Is the notion of a single country legal structure for start-ups relevant in the 21st century?

Simon Cook, the CEO of venture capital firm DFJ Esprit, questions the relevance of a geographic home and single country legal structure for start-ups.

A fascinating conference, the Web Summit, was recently held in Dublin (organised by uber-networker Paddy Cosgrave) where the founders of some of the greatest US web companies shared their stories with 800 excited entrepreneurs and students.

Before the esteemed digerati took to the podium, a debate was held on stage about what Ireland can do to ensure its own entrepreneurs are successful. There was the typical ‘how do we create our own Silicon Valley’ discussion and the typically European focus on ‘what we don’t do as well as “them”’.

Given the current state of the Irish economy, which is still suffering from the hangover of its property and leverage binge, the optimism in the room from the young Irish web entrepreneurs was impressive. There are some exciting companies emerging from Ireland, and the hope of a nation may well rest on their shoulders.

A little later Matt Mullenweg took to the stage. Matt is the charismatic and high-profile founder of Automattic Inc and WordPress, the world’s most successful open-source blogging software, powering over 200 million websites.

He chatted intimately with the audience about the founding of his company and the driving philosophies behind its success. He also shared his views on the future of blogging and open-source software development. One interesting story was that he founded Automattic with three other people from around the world, including another Irish developer. These four people had never met physically but knew each other via their web-based interactions. This created enough of a bond for them to start a company together, one that has been very successful.

Most Silicon Valley based companies (even those with virtual employees around the world) are registered in Delaware, a well-known corporate haven, but I’d be surprised if any of the people in these companies had even been to Delaware. There is actually no easy way to define a ‘Silicon Valley company’ by location of employees or legal registration.

It occurred to me that the debate about why Silicon Valley companies are successful versus other geographies is missing the point. These new virtual web companies do not belong to any region, just as the web does not belong to any country.

Automattic was effectively 50 per cent Irish at founding. A start-up with global founders could just as easily be registered in the US, Finland or Luxembourg. You will find that many other successful web companies are also virtual, with employees located all over the world, and are legally registered in countries that suit their needs.

No fixed abode

Entrepreneurs are now able to start their companies anywhere in the world, and perhaps a little more thought should be put into where the legal entity of the company is based.

Certain countries may offer advantages in business regulation, tax, the legal treatment of intellectual property, access to investment capital, public markets and other areas. Global companies need global advisors who understand the wide variety of options available, and this is needed at the earliest stages as it can be very expensive and difficult to change later on.

After the credit crunch, many countries need to find new ways to bolster their economies and perhaps making themselves attractive to the next generation of global web start-ups would be a lucrative opportunity. Even a small country could become the preferred place to start a global company by creating an entrepreneur-friendly legal and business framework.

While offshore tax shelters have become political targets for larger developed countries due to tax avoidance schemes, this support for global entrepreneurs does not have to be tax based. Other legal considerations such as intellectual property, investment capital timescales, and a fair approach to failure can also be addressed.

See also: The five countries in Europe with the lowest corporation tax – Nowadays, with the usage of the technologies, everything is possible. You can incorporate in other country and still work remotely

Another thought triggered by Matt’s talk is that this “entrepreneurial country” could also adopt an open-source approach to legal documents. Imagine how much easier and cheaper life for an entrepreneur would be if legal code was treated as open source and was open to reuse, peer review and testing. We’d have cheap, understandable, water tight and fair documents at low cost.

Legal force

The internet has been breaking down borders and established structures for over two decades now, but the notion of a geographic home and single country legal structure for start-ups dogmatically remains. Mostly this is driven by politicians who are elected by region, investors who allocate capital by territory or traditional media whose distribution channels have historically been defined by administrative boundaries.

Maybe some of that web-entrepreneur DNA will infect the political and legal structures which remain a legacy of the previous century, and are long due an overhaul. In the meantime, however, the legal home of your company is something to consider carefully, even if you start that company on the web. We live in a very competitive world, where the entrepreneur holds hope for many governments.

See also: Is going offshore a smarter way to IPO? – Consider carefully your choice of location for an offshore IPO, as many offer unique advantages to certain sectors.

Nick Britton

Nick Britton

Nick was the Managing Editor for when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

Related Topics