COO’s Secrets of the "Mature Startup" (and Selling to the Global Enterprise Customer)

The global supply chain for goods and services welcomes newcomers with the right idea.   But leadership vision and operational excellence for successful execution are critical to viability, growth, governance, exit strategy and legal compliance and avoidance of litigation.

Let’s consider the role of the Chief Operating Officer.   While the CEO provides inspiration and direction, the COO serves as an efficiency guru.  The COO’s mission is to avoid the perils and pitfalls of rapid growth while formalizing mature, transparent and repeatable processes and procedures.  A recent Wall Street Journal article (April 14, 2017) recounts how Instagram's COO Marne Levine successfully “sharpened” Instagram by formalizing operations, forging communications across teams and expanding partnerships with key external parties.

A great COO can make a difference at each stage of a company’s growth.

• In startup mode, effective operational design and internal procedures and controls are essential for negotiating “alliance agreements” with mature companies or for milestone-based R&D “joint ventures.”
• In growth mode, these same internal procedures can effectively enable sales channels for “teaming” to provide collaborative solutions by companies serving the same target customers, albeit with slightly different product or service portfolios.
• In such cases, each of two or more “team” partners (or “bidding consortium” partners) must have mature processes to succeed in a joint go-to-market strategy. This could be an OEM supply deal. Or it could be a “teaming” agreement to plan a joint pursuit to a joint target that is introduced by one of the team members. Under a “teaming” agreement, one “partner” becomes the eventual prime contractor, while the other becomes a supplier or subcontractor.
• The quintessential test of effective integration with an enterprise customer's needs is whether a provider can provide outsourced services that are essential functions (like back office and middle office) but do not define the brand.
• In mature mode, internal controls provide a platform for acquisitions and rollups, or a higher price for a sale to a strategic acquirer.

From my experience, here’s a to-do list of secrets for the COO of any company seeking high growth in today's digital business environment.

1. 360° Company Vision.  Vision requires satisfying the customer’s need, both now and as they evolve,;with a logical business model for sustaining customer satisfaction over time.  A disruptive innovation won’t survive if it lacks a broad vision for both initial disruption and eventual adoption as a business standard across industries.   In the deal, the supplier’s vision must fit the customer’s own vision for its mission.  And internally, it may require trade secret protection.

2. SaaS-ability: Demonstrable Standards for Integration with the Target Customer.   If you want to have your “as a service” solution gain traction, design it to fit the target customer’s functions, business needs and regulatory standards.  Identify and adopt all regulations applicable to your customer.  Demonstrate auditable process compliance that can meet audit standards.    In the deal, demonstrating integration with the customer’s operations is defined in the product specifications, the scope of service, representations and warranties and indemnities and termination rights.

3. Marketing Effectiveness.  Marketing prepares your target customer to identify and be favorably disposed to consider buying from you.  The organization’s message may be positive, highly differentiated and compelling, but it needs to spread across the universe that includes influencers and prospects, not just repeat buyers.  In the deal, “sales fluff” marketing inducements are excluded, but core marketing message get included in vendor commitments.

4. Sales Effectiveness.  Develop capabilities for the full chain of marketing, pre-sales and sales activities for effective deal management.  Design your sales channel for effectiveness in achieving your business model: deal structure, pricing, contract development and negotiation and overall customer experience (pre-sales and after-sale).  In a channel sales deal, targets and procedures for lead generation and customer experience need to be defined so that external sales support (agents, distributors, influencers, regulators, media, trade associations) align with the internal sales team.

5. Customer Experience/ User Experience.   Customers buy to solve a problem or fill a need. How successful are you at filling that need through effective tech support and after-sales service?  Do you use a range of tools? Do you create a customer community or user group?   Do you commit to service level agreements?  Support and SLA’s require internal policies and procedures for repeatability, training and evolution.   Your business model should fit the customer’s expectation on quality of service, but you need to decide whether you are in the “commodity services” business or in a “value-add” business for which the enterprise customer will pay added value for your “design thinking.”

6. Agility and Adaptability.  A visit to the Galapagos Islands in Ecuador shows how some species evolved and survived, while others went extinct.  Do you respond to market changes and opportunities?  How dependent are you on one recent change?  Do you apply continuous process improvement as part of your “design thinking”?  In deal mode, do you use the sales process to inquire about the customer’s wants and needs and redesign your product or service offering to adapt?

7. Viability: Viability is measured by financial results, both as to profitability and re-investment in continuous improvement.

"Mature startup" strategies can be formalized through management policies, procedures and contracts.  Virtually all stakeholders are involved:  employees, contractors, supply chain partners, licensors, channel sales and distribution partners, investors, lenders and, of course, customers.  The COO can set the path.

How to Modify Your Contracts to Reallocate Risks When Quixotic Presidential Orders Strike

In last week's blog post, I reviewed how “force majeure” issues  might excuse a contractual party’s non-performance and ways in which they might be addressed to avoid this problem.  The focus was on President Trump’s executive orders and legislative changes that could act like a hurricane to destroy predictability in international business.   Perhaps they might be merely lofty and chivalrous but impulsive and impractical, as Miguel Cervantes’ 1600’s story of Don Quixote.

This blog post looks at ways in which restructuring your contract can aid buyers and sellers under state laws for sale of goods.

The sale of goods is governed by the Uniform Commercial Code (UCC) in the 50 states.  The UCC sets forth minimum “obligations of good faith, diligence, reasonableness, and care” that “may not be disclaimed by agreement.”  UCC Section 1-302(b).  Contingency planning thus needs to consider the UCC legal framework for escaping or mitigating the impact of a new presidential executive order, law or regulation.

Pre-Contract Planning.  Risk mitigation planning starts with contract design and limitation of liability under the contract.

1. Negotiated Limitation of Liability.   Be specific and state all limitations of liability, indemnifications and non-performance scenarios (such as liquidated damages).

2. “Irrevocable” Firm Offers.  Sellers should shorten the duration of any “irrevocable” or “firm” offer  and set a reasonably early date for the expiration of the offer (See UCC 2-205), given the unpredictability of the current economic climate.  In any event, the UCC limits such “firm offers” to a maximum of three months.

Contract Restructuring.  There are several UCC rules on contract revisions. If neglected, they could result in unforeseen liability and costs.

1. Commercial Impracticability.  The UCC allows parties to be excused from performance due to “commercial impracticability.”  In other words, a contingency happened that wasn't supposed to or ordinarily would rarely happen.

2. How to Wiggle out of your Contract?   What’s necessary for modification, rescission or waiver of a contract?  If you want to wiggle out, wiggle carefully!  To modify a signed contract for the sale of goods, the changes must be in writing (except “as between merchants”).  UCC 2-209. By requesting modification or rescission, the party seeking the change may be deemed to have waived any non-performance by the other party.  To avoid this risk, the request for modification or rescission should be carefully written.  If the other party has waived a clause, the waiving party may retract the waiver by reasonable notification that strict performance will henceforth be required for any term waived.  However, such a retraction of waiver is invalid if “the retraction would be unjust in view of a material change of position in reliance on the waiver.”  So, once you waive a breach (such as for force majeure), you can’t retract it if your counterparty detrimentally relied in a material manner.

3. Kicking Your Own Bad Habits.  Similarly, have you been too lenient with your supplier by putting the contract in the drawer and forgetting the performance standards and service level agreements?  it may be time to disrupt any “course of dealing” or “course of performance” (or even “usage of trade”).  Kick your “bad habits” by expressly re-affirming that strict compliance with contract terms is required (if you are the buyer) or by proposing a modification or waiver (if you are the seller).  UCC 2—208 holds the parties to an implied contractual provision where the contract for sale involves “repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection.” If you don’t object, you’re stuck with the practical construction of the contract by course of performance, you’re committed to it.

4. Play the Game.  Don’t forget your duty to cooperate, particularly as a buyer.  UCC 2-311 allows one party to a sale contract to treat non-cooperation by the other party relating to delivery or acceptance of the goods as either (i) an excuse for his own delay, (ii) a breach, or (iii) an opportunity to proceed in a reasonable manner.

5. How Bad Must it Be Before You Can Invalidate the Deal?  Was the contract “unconscionable” at inception?  If so, the UCC 2-302 allows a court to invalidate the entire contract or just the provisions that are unconscionable.  This rule generally applies only to the sale of consumer goods.

6. Feeling Insecure about the Contractor’s Performance?  What if President Trump’s executive orders give a buyer or seller reasonable grounds to feel insecure about the future performance of its counterparty?  The UCC resolves this by allowing a party to demand “adequate assurances” and, if it does not receive them, to suspend or cancel the contract.  Under UCC 2—609, each party has a right to adequate assurance of performance by the other.  If there is no “assurance of due performance” within a reasonable time (not more than 30 days) of a receipt of a justified demand, failure to provide adequate assurances can be treated as a repudiation of the contract.

7. Launch a Pre-emptive Strike.   Whether or not a party requests and gets “adequate assurances” of performance, a contract may be canceled if one party acts in “anticipatory repudiation” under UCC 2—610.  This could be a defensive tactic used when either party can foresee that its performance may not be up to par in accordance to their contract.  Of course, a repudiating party can retract his repudiation “with due excuse and allowance to the aggrieved party for any delay occasioned by the repudiation.” UCC 2-611.

In conclusion, when force majeure clause or “commercial impracticability” under UCC 2-615 is not available as an excuse for non-performance, principles of contract restructuring may be available. However, care should be taken to avoid inadvertent technical breach by anticipatory repudiation or inadvertent waiver.

Wiggle carefully!

Legal Escapes from Disasters: Force Majeure and other Excuses for Contractual Non-Performance under Sudden Changes in Presidential Executive Orders

What’s the difference between a hurricane and a presidential order of Donald Trump? Legally, maybe not much.

President Trump’s unexpected executive order in January 2017, which banned any nationals from 7 countries from entering the U.S. for 90 days, surprised not only the would-be terrorists but also the law-abiding business community. More disruption may be foreseeable. NAFTA could be terminated or restructured. Business visas could be curtailed. Imported goods and services could be subject to a new “border adjustment tax,” while exports would be exonerated. Other disruptions to the global supply chain are clearly foreseeable, but the parameters remain to be seen.

Plan Ahead Now. Every buyer or seller of goods or services across borders should be making plans to deal with potential sudden changes in U.S. law or policy. Let’s consider “force majeure” and other legal excuses for contractual non-performance under the Uniform Commercial Code ["UCC"] (applicable in all 50 states). Possible action steps include contingency planning, review and renegotiation of contracts, repricing, workforce redeployment or restructuring, hedging contracts, business interruption insurance, business continuity planning, disaster recovery procedures, diversification of risk portfolio by sourcing from backup suppliers, and internal and external audits of procedures.

What is “Force Majeure”?   “Force majeure” is a common law concept of equity that excuses non-performance by a seller. Typically, “force majeure” clauses in a contract define the types of events: natural disaster or regulatory prohibition. Less obvious is whether the “force majeure” concept gives a valid excuse not to deliver due to a sudden increase in the price of components or commodities, and, if so, whether such an excuse depends on whether the new shortages in global supply arise from speculators seeking to corner the market, hoarding by merchants to hedge against future risks, uncertainty or a other sudden increase in demand for the item in the marketplace. Even less obvious is whether a sudden new regulation qualifies as a force majeure if it merely increases the cost of doing business, adds a new tax to a type of transaction (such as a tax on imports of products or components needed for manufacturing), or imposes a new requirement for a governmental license. 

Drafting (or Reviewing) Force Majeure Clauses. It’s time to review your contracts and perhaps seek modification to your “force majeure” clauses.

1. Definition.  What is a “force majeure” event for purpose of this contract? The contract should define it by including specific examples and excluding cases that might be recurring, predictable and thus “ordinary” risks to be allocated expressly by contract. Must the event be unforeseeable, or merely overwhelming?

2. Impossibility?  or Mere Change in Costs of Delivery? Must the impact make performance impossible, or will the contract be changed if there is merely an extreme difficulty or higher cost? Where possible, the parties should allocate risks by specifying outcomes of predictable contingencies, such as (i) sudden shortages in the marketplace, (ii) changes in pricing or exchange rates, (iii) regulatory changes that affect the normal supply chains for labor and goods.

3. Required Mitigation?  What actions must the affected party take before the impact of the force majeure event can validly excuse non-performance or delay performance? At a minimum, one might ask the affected party to take reasonable measures using reasonable effort to overcome the adverse impact.

4. Option to Pay to Cure?  May the unaffected party insist on the right to pay extra to get a “cure” and thus enjoy the benefit of the bargain, albeit at a higher cost?

5. Notice and Other Conditions for Being Excused.  Must the affected party give notice of inability to perform due to a “force majeure” event? And how soon, to be “timely”? What kind of notice is needed? What are the consequences of not giving timely notice? Is the giving of notice excused when the unaffected party has actual or constructive notice (such as by reading newspapers or watching a TV journalist’s nightly critiques of Trump’s operations)?

6. Duty of Cooperation?  What level of cooperation (and effort and payment of money to overcome the force majeure’s impact) is required from the un-affected party?

7. Cancellation.  How long must the parties wait before treating the contract as cancelled?

8. Practical Risk Management Solutions.  What alternative solutions exist when both parties refuse to accept a risk?

a.  Insurance.  Either party can purchase business interruption insurance and thus quantify the allocation of risk. Insurance also can cover loss of the goods. What conditions are necessary to have such insurance coverage? When does the insured acquire an insurable interest?

b.  Disaster Preparedness.  Procurement officers normally insist on the seller’s or service provider’s having a business continuity plan and disaster recovery procedures, which would be audited under SOC II or SSAE 16 Type II audit processes.

c.  Resiliency in the Global Supply Chain.  Potentially, goods or services could be provided from centers located in geographies with different disaster profiles. A portfolio approach could be used to mitigate risks (political, technical, economic, pricing, regulatory, etc.) that are related to any one particular supplier.

Force Majeure in the Sale of Goods: "Commercial Impracticability" and Legal Prohibition.   In two scenarios, a seller of goods is excused from non-performance under UCC 2-615 (with caveats):

• “if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made. “ In other words, a contingency happened that wasn't supposed to happen or ordinarily would rarely happen. Or


• “by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.”

Few contracts identify the “basic assumptions” that underlie the commercial reasonableness. Hence, the “commercial impracticability” defense under UCC 2-615 is so vague that it invites mediation, negotiation and settlement. Once it applies, though, the supplier must allocate resources in a fair and reasonable manner.

In this Trump era, unexpected and sudden changes in U.S. laws, regulations and policy may be the order of things to come. Service providers, supply chain managers (from CEO’s, CFO’s and CIO's all the way down to procurement officers) and e-commerce merchants need to rethink contingency planning, including redefining Force Majeure clauses.

More on this in my next blog.

Game Plan for Building a Tech Supplier to Multinational Enterprises

New technologies are changing the way personal data can be used to simplify complex tasks for financial transactions, life sciences and business services and the “connected devices” of the Internet of Things. Applications Programming Interfaces (API’s) are stealing the show in data-driven businesses like FinTech, HealthTech, EduTech, drones and blockchain . There are lessons for legal, accounting, marketing, sales and tech. What have we learned?

1. Start with Compliance in Mind. If you are developing any solutions that depend on data, first identify what legal requirements your customers must satisfy, and be ready for the interrogation from the customer’s compliance department. Identify the customer’s vendor assessment procedures and be ready from the start.

• For financial tech (“FinTech”), your processes (and your business model as evidenced in your contract templates) must meet the complex regulatory requirements.
• For HealthTech, your data collection must satisfy HIPAA’s rules on data collection, storage, usage and destruction. 
• For IoT device management, you can minimize security risks by using layers of security in all devices, limiting the processing capacity of the IoT devices, putting the processing capacity in secure servers, and designing the hardware for future software and security updates. 
• For consumer data, position your servers strategically (for limiting jurisdictional long-arms) and choose self-certification for Privacy Shield or practical alternatives. 

Consider a structure that complies with the “Service Organization Controls II” ("SOC Type II") audit procedures of the AICPA for information governance (“IG”), International Standards Organization 27001 and, more generally, internal controls relevant to security, availability, processing integrity, confidentiality and privacy. Be ready for a source code escrow agreement, but maybe you can cut off such a discussion by demonstrating that there is no need because of your “robust controls” and the value of your patents (not just the value of the source code).

2. Start Lightweight for Agility and Adaptability. You can identify a spot in a complex process (e.g., customer onboarding for banks) and optimize constantly with feedback from customers. The process of customer onboarding is complicated by the need to get data from a broad spectrum of reliable data sources. If you simplify the bank’s compliance with its “know your customer” (KYC) requirements, the prohibitions on dealing with “specially designated nationals” (“SDN’s), anti-money-laundering (“AML”) rules and export and import controls, etc., you will have a big win. The “waterfall” development process works fine if everyone has time. Scrum and agile development require close controls of each iteration. Maybe you might develop an API that is more agile than scrum software, since you are integrating with multiple data sources rather than redefining existing (“old”) methods.

3. Start with Cheap or Free “Big Data”: Find Value in “Digital Exhaust.” People and businesses have become so focused on social media, mobile applications, etc. that you can mine the Internet for data that you might otherwise need to pay a data broker for. Free is better than cheap.

4. Integrate with the “Big Dogs”: Be Disruptive yet Collaborative within the Ecosystem. You can be disruptive and yet add value to enterprise customers within traditional ecosystems. Fill a gap that “big dogs” do inefficiently or with unnecessary layers of middlemen. For example, LendingClub.com uses its own customer evaluation process to generate and issue loans to qualified borrowers and then sells off the loan portfolio for a profit, shifting the future revenue stream and risks to the banks that want to purchase and administer the portfolios. As such, the traditional banks become a distribution channel for new FinTech generators of new loans as a portfolio.

5. Find and Support the Change Agent at the “Big Dogs.” Big companies are in conflict between the need to centralize controls under a CTO or CIO function and the need to be nimble and responsive to customers (the line of business functions). Your sales team should identify the “early adopters” of new technologies and new processes, as well as be in touch with the nominal head of the IT organization. Even if your big customer has appointed an “innovation” department to enable some form of novel thinking, understand that such teams might not have the capacity to be advocates of the changes that the Big Customer needs.

6. Train and Support the “Big Dogs.” Disruptive business models can easily fail without handholding (technical and commercial reinforcement) to ensure adoption and integration of change into daily processes. Don’t let the customer down. Give them a 90-day period of training, support, internal review, adaptation and consolidation of the changes. Otherwise, inertia will defeat the innovation. 

7. Use Process Automation for Low-Value, High Volume Tasks. You can get love and affection from the big banks which would prefer to spend their precious skilled resources on devising and implementing strategies for big customers for big fees. You can make good money taking care of the smaller customers whose needs are defined, repeatable, measurable, and time-sensitive and, most important, unloved and uncompensated.

8. Design for Key Performance Metrics. Whether in the Cloud or on premises, design your processes for the most important Key Performance Indicators, beyond the SOC Type II protocols. In the Cloud, flexibility in process integration across data sets and low latency seem to trump other operational factors. Keep processing fast by using few resources and avoiding unnecessary pre-processing of unnecessary data.

The success rate for the integration of disruptive data-driven businesses (typically, startups) with global enterprise customers is very modest. The chances for success can be improved if you simplify processes (at least for the end user), integrate your tools into existing Big Data and economic processes and provide customer engagement and support. If you have all this, you can look forward to faster and more positive evaluation as a qualified vendor and less angst in contract negotiations on limitations of liability, indemnification and risk management.

"Revitalize a Spirit of Entrepreneurship" – New Mission for the SBA??

On January 24, 2017, the U.S. Senate’s Small Business and Entrepreneurship Committee quizzed Linda E. McMahon as President Donald Trump’s nominee to be the Administrator of the U.S. Small Business Administration ("SBA"). See the SBA’s website at www.sba.gov. Confirmation of U.S. cabinet members can often expose the nominees to hostility and challenges. Here, these hearings were collaborative and not contentious.

Perhaps that’s because Mrs. McMahon was a former candidate for Senator (Conn.) and introduced and endorsed for this position by the two Senators who beat her in 2010 and 2012. She was also the former CEO and President of World Wrestling Entertainment, Inc. (“WWE”), stepping down in 2009. As entrepreneurs, she and her husband built their business from a privately owned company to a publically traded global enterprise, with over 800 employees. At her hearing, she acknowledged that, "Like all small business owners, I know what it’s like to take a risk on an idea, manage cash flow, navigate regulations and tax laws, and create jobs."

The Small Business Administration plays several key roles in supporting job growth through entrepreneurship. Its purpose is to help "level the playing field" between small and larger businesses. Senators mentioned statistics that small business accounts for perhaps 90 to 98% of businesses and about 64% of job growth in the United States. Job growth is a key target of Donald Trump’s “Make America Great Again” campaign slogan.

Here’s what seems critical to U.S. job creation and “Making America Great Again.”

• Regulatory Complexity and Compliance; Unusable Websites. Entrepreneurs face disproportionate costs and distractions from excessive bureaucratic complexity and compliance obligations, both for operations and for taxation. Small businesses often don't have the resources to wade through the complex web of “jargon-filled” federal regulations. The Senators urged simplicity, fewer regulations, quicker bureaucratic responses and “normal websites that a normal person can understand.” So they called upon Mrs. McMahon to be a strong advocate of deregulation and simplification of regulation.
• Government Procurement. Small business is generally excluded when governmental procurement solicits big projects and fails to carve it into smaller projects. Other agencies are not held accountable for allocating a fare share to small businesses, particularly, women-, minority- or veteran-owned businesses. Senators urged her to lower regulatory burdens by promoting smaller government procurement projects and advocated getting a fair share of these projects allocated to small businesses.
• Office of Advocacy ("OA"). This office within the SBA is responsible for intervening with other federal agencies on behalf of small businesses. It has a spotty record of success. Mrs. McMahon committed to learning about what did not work and will give it teeth to become more successful.
• Education. The Senators identified the mismatch of job opportunities with the skills offered by the American workforce. Mrs. McMahon believes that this is due to a shortage of trained people for these jobs and committed to explore how the SBA may promote educational programs and outreach to communities. Nothing was mentioned about policy issues involving skilled immigration, such as H1-B visas or foreign entrepreneur visa waivers or parole. 
• Access to Capital. The SBA acts both as bank lender and guarantor of bank loans. Senator Mazie Hirono, D-Hawaii, wanted Mrs. McMahon to identify the factors that restrict a small business’ “access to capital.” Mrs. McMahon replied that the recent restrictions imposing over-collateralization requirements on small business, to protect bank solvency, actually hurt job growth. Since collateralization is a key principle of prudent lending, Mrs. McMahon distinguished a good “cash flow business” from a “bricks and mortar business” (that owns it real estate). She reminded small businesses to get a line of credit once they have begun earning money, since debt can accelerate real growth and sustain continuity in a surprise downturn.
• Critical Role of Intellectual Property. Mrs. McMahon responded to a question on the importance of teaching entrepreneurs to protect their intellectual property. IP rights were the cornerstone of the WWE’s growth. According to my handwritten notes written in my kitchen, she said: “Intellectual property was a large part of the WWE. From the beginning, we wanted to be sure of our rights. It was very important that we copyright our TV shows and our music programs. You might have invested so much, but if you don’t protect your intellectual property, you don’t have a leg to stand on. You need to protect that and spend money on intellectual property protection.” 
• Disaster Relief. Small businesses are hardest hit by natural disasters and Mrs. McMahon stated that this is her first priority, should she be confirmed. Small businesses might not have adequate capital to replace inventory or facilities destroyed by hurricanes or floods. Both FEMA and the SBA provide assistance, but SBA provides emergency loans. Mrs. McMahon identified a key goal to focus on the disaster relief program to help small businesses get back on their feet. Sen. Marc Rubio, R-FL, asked to extend SBA disaster relief to cover pandemics like the Zika virus as a natural disaster.
• Small Business Innovation Research Program. Aside from lending programs, the SBIR (a temporary) program provides grants to small businesses that develop innovative products. Such funding has been critical to supporting innovation in governmental programs, especially military innovation. Senators urged that Mrs. McMahon support making this a permanent part of the SBA.
• Mentorship. Everyone agreed that the Service Corps of Retired Executives (“SCORE”) provides invaluable mentorship and advice to entrepreneurs and is a good investment for the SBA. Mrs. McMahon would like to see more mentoring. But she warned that SCORE mentors should be free to warn “this business will not be a success” when necessary. I guess she will be visiting some incubators soon! 
• International Trade. Ranking Democrat, Sen. Jeanne Shaheen, D-N.H., asked Mrs. McMahon for support in international trade. Import-focused trade might run contrary to President Trump and other Cabinet members’ agendas, but export-focused trade (including SaaS online services and IoT devices) could be a good fit for promoting high-growth U.S. small businesses.

The Committee hopes to make a decision next week, but the record remains open for two weeks after Jan. 24 for additional submissions concerning Mrs. McMahon’s nomination. Speak now or hold your peace.

International Entrepreneurs: Welcome to America (Visa Waiver / Parole)

We promised you a final update. Here it is.

The Final Rule on the U.S. International Entrepreneur Visa Waiver (Parole) was published this past Tuesday, January 17, 2017. Applications can be submitted on July 17, 2017 and anytime thereafter. Get ready! Bring on your STEM, IoT, SaaS, cybersecurity, DRaaS, fintech, blockchain, edutech, healthtech, Big Data and Cloud Computing!

Summary.  Under the new Rule, the USCIS may authorize a foreign “entrepreneur” to work in the U.S. for a U.S. “startup entity."

• The entity must have been formed not more than five years before the filing date of the application.
• The entrepreneur must own a “substantial percentage” of equity in the “startup entity,” being 10% at the time of the application and being diluted to not less than 5% after subsequent additional funding. 
• “Qualified” U.S. investors must have made a minimum “qualified investment” of $250,000 in acceptable securities (convertible debt, equity or contracts for such securities). The investment must have been made within 18 months before the foreign entrepreneur’s application.
• If qualified, the foreign entrepreneur can remain for up to five years, divided between two periods of up to 30 months each.

This is good news for U.S. startups and high-growth innovative companies and U.S. private equity investors.

Implications for Foreign Startups Coming to America. Foreign startups might use the rule too by converting to American startups! Globalizing foreign startups could take their teams to the U.S. for some functions but not others. Maybe this Rule could be a tool for globalizing high-growth companies that already have begun their development and growth abroad, but want to have the leadership located in the U.S. The Rule supports foreign entrepreneurs despite:

• the original location of some business operations and assets outside the U.S., such as R&D, product testing, marketing, sales or administrative support; 
• the conversion of a foreign startup to a U.S. startup (through a little gymnastic flip using tax-free corporate restructuring); and
• the existence of some foreign capital investment. 

Since the Rule was not intended for such scenarios, the Trump Administration might interpret the policy basis to focus on U.S. job creation. Foreign startups that contemplate using this visa approach might wish to limit the relative importance or the growth of foreign jobs.

Comparative Benefits. As with any innovative governmental program, the International Entrepreneur Visa Waiver (Parole) Rule is not an “open floodgate.” The USCIS estimates that only a total of 2,940 entrepreneurs will be able to qualify in this initial year of the Final Rule.

Given this focus and orientation on growing local American startups, this Rule may be more difficult to comply with, both initially and upon renewal, than a H1-B, L1-A, L1-B or E-1 or E-2 visa for foreign high-growth companies coming to the United States.

Update on U.S. Visa Waivers for "International Entrepreneur"

Are you a foreign entrepreneur/innovator wanting to come work and grow your business in the U.S.?  The Visa Waiver for International Entrepreneurs is “almost” ready.

In August 2016, the U.S. Customs and Immigration Service, a division of the Department of Homeland Security, published a Proposed Rule that would enable the USCIS, on a discretionary basis, to admit foreign entrepreneurs of startup companies for temporary stays in the U.S. in order to grow their businesses.  Qualifying entrepreneurs would need to meet stringent requirements. The duration would be for an initial two years, with the possibility of renewal. 

The Proposed Rule was open to public comments until October 17, 2016.  After reviewing hundreds of comments, the USCIS issued a final International Entrepreneur Rule, with changes from the Proposed Rule.   This final Rule went to the Office of Management and Budget (OMB) for review on December 29, 2016.  The OMB’s Office of Information and Regulatory Affairs (OIRA) evaluates a final rule, typically within 90 days.  However, this OIRA review was completed very quickly by January 5, 2017, we think in anticipation of the expiration of the Obama Presidency on January 20, 2017.  Therefore we expect the final rule to be published shortly in the Federal Register.  It is likely that this Rule will be effective under the forthcoming Trump Administration.  However, pending actual publication, details of the final Rule remain confidential.

While President-Elect Trump might take steps to invalidate this “rule by executive penmanship,” we think President-Elect Trump will not object to this new rule.  His opposition to immigration has been focused on illegal immigrants, while he promotes entrepreneurship, jobs in America, tax-paying business operations and innovation.  Whatever its configuration, the new International Entrepreneur rule will be good for global startups as well as the American innovation eco-system.

Once we know more, we will keep you informed.