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- | ====== Foreign Investor ====== | ||
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- | Uber, Tesla, and Slack show how Saudi cash is flowing into Silicon Valley. Here are 5 questions every US tech startup founder needs to ask before taking money from a foreign investor. | ||
- | Becky Peterson | ||
- | May 18, 2019, 8:45 AM | ||
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- | Yes, the early days of Silicon Valley were so geographically constricted that many of the most high-profile investments were made by people who worked near each other on the legendary Sand Hill Road. But today, the startup investment ecosystem is global, with large checks being written by foreign allies and adversaries alike. | ||
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- | While investors are eager to open their wallets, taking a foreign investment isn't as simple as cashing a check, said Doreen Edelman, head of Lowenstein Sandler' | ||
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- | As US startup founders consider to whom they want to sell equity, they must also consider a host of legal issues that could come up with foreign investors, she said. | ||
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- | Depending on the circumstances, | ||
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- | Sanctions and tariffs can also create problems for companies down the road. | ||
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- | Before any of that happens, these are the five questions Edelman says every tech founder needs to ask themselves when considering a foreign investment. | ||
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- | If you're a tech company working on artificial intelligence, | ||
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- | There are 27 different industries under the Department of the Treasury' | ||
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- | Companies outside of those industries can voluntarily file with CFIUS as well just to make sure everything is in good standing. | ||
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- | In theory, regulations against foreign investments are designed to prevent foreign governments from getting access to technology or intellectual property that could harm US national security. You probably don't want a foreign government to have access to the software used by the National Security Agency, for example. | ||
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- | But the definition of " | ||
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- | Traditionally such laws only impacted technologies in the defense sector. But today the US government takes a broader scope, Edelman said. | ||
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- | "It could be anything, if you look at it through the lens of, what could an anti-US government or group do with it?" she said. | ||
- | Could that change in the future? | ||
- | IBM CEO Ginni Rometty may have a strong grip on government contracts, but founders who might want to compete with IBM should think through foreign investments. IBM | ||
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- | Whether or not a technology is used by the defense sector today, Edelman said, it's important that founders consider whether they could eventually grow into the niche. | ||
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- | "Could you be in the defense sector? Be aware of what that will mean going forward," | ||
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- | Under certain circumstance, | ||
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- | "If Chinese money is going to invest in a potential defense product, even a commercial product that may work in the defense sector in the future, you need to be prepared that it's going to affect what you can do down the road," Edelman said, adding that the same concern applies to investors from other countries. | ||
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- | " | ||
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- | Who is the investor? | ||
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- | Sorry, Prime Minister Justin Trudeau, even Canadian investors could face scrutiny from the US government. | ||
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- | While CFIUS has more-or-less put a pause on all acquisitions and investments between the US and China, founders need to pay attention to foreign investors whether they are based in a country that is a friend or a foe to the US. | ||
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- | "It can be Canada. It can be Israel. It can be Germany," | ||
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- | Ultimately, whether or not an investment is an issue will come down to the specifics of the investment, Edelman added. | ||
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- | If Mubadala, a state-owned investment firm in the United Arab Emirates, was a limited partner in a funding round without any control over the company, it would most likely not cause a stir. | ||
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- | "If it's truly an LP just investing for money," | ||
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- | That said, founders will want to be mindful of the shifting geopolitical landscape since the Trump Administration mixes politics and trade differently than in the past, she said. | ||
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- | "This president is using the tools in his tool box differently," | ||
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- | A Japanese company that does business with North Korea or Iran will be viewed differently than a Japanese company that doesn' | ||
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- | " | ||
- | Will they have access to the " | ||
- | Steve Mnuchin, secretary of the U.S. Treasury, may have more concerns about a foreign investment if that investor has access to the technology as part of the deal. Yuri Gripas/ | ||
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- | Another question founders should ask before taking a foreign investment is how much information they would be required to share with the investor. | ||
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- | Foreign access to "any control technology or the secret sauce or the IP or personal data" could all create issues for the company, Edelman said. | ||
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- | Early stage investors are often deeply involved in the business process, and access intellectual property and customer data as part of day-to-day business. The US government sometimes requires permits to share technology between countries. | ||
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- | Companies in industries highlighted by FIRRMA are required to file with CFIUS if investors will have access to their technology. | ||
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- | Founders must also consider whether there are any export controls on their product. | ||
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- | While a tech company may not necessarily export products via ships at sea, some cloud based software is still controlled for export and may face restrictions on who can use it or buy it abroad. | ||
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- | "A tech company that doesn' | ||
- | Will they have a board seat? | ||
- | Rajeev Misra, the head of SoftBank' | ||
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- | Giving up a board seat to a foreign investor further complicates the process. | ||
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- | Japan' | ||
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- | "If you want to give them the board seat, you need to know that would require you to go through the CIFIUS process," | ||
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- | Even companies which are not mandated to file may be inclined to file because of the board seat, she said. | ||
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- | Disclosure: Axel Springer is Business Insider' | ||