We recently hosted a US expansion dinner discussion as part of Nauta Collective, bringing together B2B software founders from our community for operator-led sessions on common challenges.

The workshop was hosted by Daniel Glazer, London Office Managing Partner and US Expansion Lead at Wilson Sonsini. As well as supporting some of America’s biggest software successes, the firm has worked with over 2,000 European startups launching, scaling and/or fundraising in the US.

The path is well trodden and one of Daniel’s opening remarks was of the three certainties in life: “death, taxes and European startups expanding to the US”. That’s because the opportunity for capital, customers and talent is much larger for companies successfully operating in both continents.

But the increase in opportunity brings heightened competition, expectation and in some sectors, regulation. Founders spent the evening discussing these challenges and learning from Daniel’s vast experience helping companies navigate them.

The two main approaches

Daniel categorises the two main approaches to US expansion as either going early or going late. Companies should avoid the middle ground of trying to reach product-market fit in both markets simultaneously.  

Two main approaches to US expansion:

• Go early: Optimise for US market from the start, moving or hiring the founding management team accordingly

• Go late: Build UK/European foundation first and expanding based on US traction or market pull

Deciding which approach should be mostly determined by the product and market you operate in. For some companies, winning the US is fundamental to success and so going early is imperative.

In either case, the operating costs in the US are clearly much higher (primarily on talent) and so the potential upside of capturing US customers should provide a clear ROI justification for a startup investing in the launch. For more insights on timing have a look at Frontline’s very useful guide.  

Delaware company structure options

When expanding to the US, your company needs to incorporate in a US state and many companies choose Delaware. Delaware's popularity is due to its pro-business environment, flexible laws, and specialised court system.

There are two approaches to Delaware structuring with different implications:

Subsidiary approach:

• Delaware corporation wholly owned by UK parent

• Suitable for hiring employees and most operations

• Can be set up in 24 hours

• Minimal cost implications

Delaware flip approach:

• Delaware parent company owning UK subsidiary

• Mainly required for US VC investment (80% likelihood to be required at Seed stage but dropping at Series A and beyond)

• Requires unanimous shareholder approval (which can take a very long time if you have a long tale of angels)

• Can maintain EMI options by shifting to Delaware parent

• Cannot be easily reversed once completed

For a more detailed summary and some reflections on Delaware’s status as favoured US corporate home read Wilson Sonsini’s article.

Considerations when raising from US VCs

As mentioned above, when raising from US investors there is a different set of expectations on a startup and its founding team on matters such as company ownership, dilution, consent rights, warranties and commitment to a very large outcome.  

These expectations change depending on your stage. Pre-seed investors such as YCombinator are much more likely to expect a Delaware parent company but once you reach Series B and beyond, US investors are more likely to accept UK parent companies and so it's worth considering when you expect to raise from US VCs.

US VCs expect:

• Clear path to $3bn+ exit potential (on the basis that 10% ownership could return a $300m fund)

• Aggressive growth mindset amongst management team

• Founder commitment to massive outcomes

• Larger option pools than the UK norm

Red flags for US investors:

• Excessive early dilution (below 40-50% founder ownership at Series B)

• Too many investor consent rights

• Founder warranties

There is a lot of guides on raising from US investors for both UK startups (such as this from SeedLegals) and European startups (such as this from Octopus Ventures).

US sales contracts vs UK sales contracts

US and UK contract law differ significantly. In the UK, there’s essentially one body of law with some variations in Scotland and Northern Ireland. In the US, there are federal, state, and even local laws. This means that each US state has its own laws and courts so legislation can differ from place to place.

Key differences due to litigation environment:

• US contracts require more detailed protection

• Uncapped liability is common in the US

• In addition to aggressive IP ownership claims

• Higher insurance requirements

• Contracts viewed as living documents requiring regular reference

A negotiating tip when working through contracts with a US customer: appeal to a business contact, rather than the legal team, for some empathy around unreasonable terms. But be careful to save this for the right moment, as it might not work again.

For a good summary of where the key differences line, check out: “You Promised What?!” Warranties and Disclosure in the UK and the US.

Legal structure requirements

There are five core logistical considerations to prepare when setting up in the US:

1. Legal setup (company formation, employment docs, options)

2. Tax/accounting (EIN, transfer pricing)

3. Banking

4. Business insurance

5. Payroll/benefits (typically via PEO)

A rough timeline and summary of the costs

As you start planning the timeline and costs for the expansion, the key tasks are basic US setup, visas, personnel costs, and setup costs. Processing visas is the most unpredictable task which could take an average of 3-6 months.

Typical timeline:

• Basic US setup: 3-4 weeks excluding visas

• Visa processing: 3-6 months average

Personnel costs:

• US salaries 2-4x UK equivalent

• Benefits/payroll: £15-20k per person annually

• At-will employment allows quick termination

Setup costs:

• Legal/accounting: Single digit thousands

• Banking: Minimal fees

• Insurance: A few hundred to a few thousand depending on risk

Summary

There is a lot to consider for founders looking to expand their company to the US for customers or capital raising. Much of these considerations are determined by your product, your market, your ambition and your timing. In summary:

• Go early or go late, don’t try to do both

• Make sure to factor in the ROI justification in your decision to expand

• Carefully consider the best way to structure (Delaware subsidiary or parent)

• Be highly diligent when reviewing US customer contracts

• Re-structuring doesn’t need to be expensive but remember that getting a visa is likely to be the longest part of the process

Daniel covered an extensive range of topics in the room and has covered many more in his US Expansion and Fundraising FAQs which you can find here. If you want to get in touch with him, you can at daniel.glazer@wsgr.com and through LinkedIn.