Foreign nationals in a nonimmigrant status and start-ups
Anyone who has hung around the tech community in Boston, knows that foreign nationals play a huge role in this ecosystem. So it is worth focusing on some of the issues that are particular to foreign nationals. Pritvi Tanwar of our firm has the following to say on this topic:
The New England Area and Boston in particular, through its universities and companies, attracts outstanding talent from around the world. It is no surprise then that many international students and other nonimmigrants go on to found or be founding members of companies in and around the Route 128 area. Starting a company as a foreign national in nonimmigrant status (a “Foreign National”) presents certain challenges and below are a few issues to be aware of:
1) Entity Choice – Many start-ups with two or more founders usually choose to incorporate as S-Corporations to benefit from the pass-through tax status of a partnership while still getting the limited liability protection afforded to corporations. However, all the shareholders of an S-Corporation must be citizens or permanent residents of the United States. This precludes the S-Corporation choice for start-ups where any of the founding members are Foreign Nationals. Also precluded are companies that plan to bring on Foreign Nationals in the early stages that they plan to pay with equity in the form of stock options. The logical choice for start-ups facing these challenges is a C-Corporation. Though this entity choice presents a double taxation issue, most technology start-ups are not profitable in the initial stages and any tax liability at the initial stages is usually minimal or non-existent. In addition, most VCs and investors will require any S-Corporation they fund to convert to a C-Corporation due to tax reasons (a topic for a different day). Hence, if you believe that your company fits the VC model of investment and you plan on approaching VCs for funding down the line you might be better off choosing the C-Corporation entity structure today.
2) Payment Schedules & Vesting – Another issue that often comes up for start-up founders and employees who are Foreign Nationals is the issue of employment. The U.S. Citizenship and Immigration Services’ (the “USCIS”) position is that “working” (i.e. providing services for compensation) without the requisite authorization violates the terms of the individual’s nonimmigrant visa and is potentially grounds for termination of the visa. Although the granting of founder’s stock at the inception of a company may not amount to “compensation”, the problem arises upon the vesting of any stock contingent on the founder or employee continuing to provide certain services to the company. The USCIS may interpret this as a situation where the individual is “working” and violating the terms of his or her nonimmigrant visa. Granted, this is gray area and this author does not know of any case where the USCIS has enforced a violation where the vesting of stock has been subject to an employee’s continued contribution to a start-up company, but it is a risk to be aware of and mitigate in the event that the USCIS changes its enforcement policy. Potential precautionary measures are entirely dependent on the individual factors of your start-up, the amount of risk you are willing to take and the enforcement policies of the USCIS – excellent reasons for you to have a three-way conversation with your start-up lawyer and an experienced immigration law attorney.
3) Enforceability of NDAs and Assignment Clauses - Your co-founder and/or founding employee might one day decide to head back to their home country for personal or business reasons. Departing with them could be your start-up idea and possibly detailed knowledge of the technology that you are implementing. You probably already have NDAs with the relevant IP assignment clauses executed by all the founders and employees – but are these enforceable in a foreign country? Not if the governing law is based in the United States. Making your NDAs applicable in foreign jurisdictions is complicated and expensive and perhaps not the best use of resources for a cash-starved start-up. One possible approach to this scenario is to postpone this process until your start-up’s business and technology grows to the point where you are undermining yourself by not addressing the risks presented in your particular case. Also, keep in mind that actual enforcement in some countries can be a logistical and financial nightmare. Once again, there is no one-size-fits-all answer and a discussion with you start-up counsel is the best starting point to understanding the risks that your start-up faces.
