“Innovation House” explored which locations are considered to be the most attractive for Ukrainian startups in terms of registration, and why are they unwilling to stay in their homeland.
Mass media has a great number of success stories of Ukrainian startups. One-of-a-kind software, “smart” gadgets, technologies created by Ukrainians, – they raise considerable investments and receive enthusiastic comments of compatriots. However under most circumstances startups as such are registered outside the country. Why is this happening so? And can these companies be returned to Ukraine?
Our guys in Hollywood
“Company from Palo Alto, California, CA, thought out how to operate robots and drones in the absence of GPS navigation”, – this is how American website Venture Beat speaks of Ukrainian startup in augmented reality field. Despite the fact that company’s founder Vitaliy Goncharuk has never concealed his origin, and the development team resides in Odesa city, homeland is the only place where this company is considered to be Ukrainian.
Since its foundation in 2010, Augmented Pixels has raised more than $1.5 million investments, was ranked as one of the best UK startups in augmented reality field, and got Financial Times award along with such companies as Tesla Motors, Bosch and Square.
Yet another example – Ukrainian startup Sixa, which renders remote access service to supercomputer and its computational power. In less than two years of its existence, it raised more than $3 million of investments. Development team and startup founders reside in Ukraine and company’s headquarters – in San Francisco.
Startups of Ukraine in Europe
In the same place, in San Francisco, well-known startups, founded by Ukrainians, Petcube (gadget and social network for pet owners) and Grammarly (grammar check service) are settled down.
There are plenty of examples of Ukrainian startups registration in Europe. Among them – VRnet.io service converting 3D models into Virtual Reality walkthroughs. It passed acceleration at Startup Wise Guys and registered legal entity in Tallinn. VRnet.io’s website states that it is Estonian company, although it started its work at hackathon in Ukraine.
First of all every more or less viable Ukrainian startup is being registered abroad. Development may be performed in Ukraine, and part of taxes will be even paid here. But, main activity, inclusive of transactions in sale and investment raising, will be performed in the registration country.
Not the problem of Ukraine
Usually startups – are global companies, therefore they are registered at the primary market, where they currently work or plan to work. “It’s the world’s practice, and not the problem of Ukraine,” – Andrey Kolodyuk, CEO of Ukrainian Venture Capital and Private Equity Association (UVCA), said.
CEO of Axon Partners Law Firm, Dima Gadomsky, clarifies: if initially the product or service is aimed at American market, then the company will be registered in the US. If at European – in the UK, Netherlands, Luxembourg, Cyprus. If at Asian – in Hong Kong and Singapore. Powerful ecosystem of startups – in the US state of California, in Berlin (Germany), in Tel Aviv (Israel). Legislation of such countries protects the rights of shareholders and offers suitable taxation system for the startups. For instance, in the state of Delaware, company may pay $300 a year, until its annual turnover exceeds $1 million. “During the fledgling years startups usually earn nothing. Therefore it’s natural for them to seek for locations, where they can easily and quickly create and maintain company at minimum expense,” – Gadomsky explains. To become such kind of business offshore, Ukraine shall completely change its legislation. It still looks like a utopia. But according to Andrey Kolodyuk, it’s quite possible to become an IT-offshore – safe place for IT companies, the majority of which are startups. He believes that if relevant economic environment is created, not only Ukrainian, but world’s startups will start to register themselves in Ukraine. This is what exactly happened in Ireland, for example, which provided conditions for economically advantageous operation, and at the present day Apple and Google are registered in the country.
However, Dima Gadomsky does not believe in IT-offshore prospects in Ukraine. “That’s very odd that judicial system does not work in the country, there is no private ownership of land, corporate and labor legislation is backward, but then we have IT-offshore. To start with we shall reach Ireland in terms of ease of doing business, and afterwards we may compare ourselves with it.” – pondered he.
What startups are considered by investors as “Ukrainian”:
Ukrainian Venture Capital and Private Equity Association (UVCA) performed study and defined what startups are considered by investors as “Ukrainian”:
- 70% of investors consider that Ukrainian startups are the startups having Research and Development (R&D) center or company’s majority in Ukraine;
- 17% of investors consider that Ukrainian startup is the startup, all the founders of which are from Ukraine;
- 9% consider that company shall be registered in Ukraine to be considered as Ukrainian;
- 4% call the startup Ukrainian, if at least half of the founders are Ukrainians and own at least 50% of company’s shares.
Currently the laws of Ukraine are not fit for work with startups and venture capital market. “Ukraine even has no such form of legal entity allowing you to run startup business and raise investments.” – Ksenia Belkina, co-founder of Cardiomo startup, said. Her company is registered in the US in the form of C Corporation, protecting shareholders from financial or other business problems.
Draft law No. 4666 On Limited Liability and Companies may resolve shareholders’ rights protection problem in Ukraine. It is already passed in the first reading and is being prepared for the second one.
However, according to Natalia Solomakhina, Head of Legal Department of Digital Future venture company, legislation is not the only problem. And even if there is company registered in Ukraine, investor is very likely not to wish to invest money in Ukraine. “Illegal takeover, search and seizure of IT companies, imperfect judicial system – this is what potentially may “frighten away” investor from investing in Ukrainian companies.” – she said.
The country shall travel a long way to be the safe place for startups and venture capital investments. To start with – to limit the seizure servers of IT companies by law enforcement officers, to continue currency liberalization for the free capital flow from and to abroad, to enhance property protection, inclusive of intellectual property.
Startup registration in Ukraine and the US: what’s the difference?
Maria Shkarlat, Financial Adviser of Cardiomo startup tells why Ukrainian founders decided to register the company in the US. And what is the difference in conduct of business within American and Ukrainian jurisdictions.
When you open company in the US, the difference is felt all along the line.
I’ll start by saying that the state is only placing on record the fact that company exists. And unless and until it becomes too big or becomes listed, hardly anybody interferes with its organization and activities. In other words company shall exist within certain legal environment, but all this happens at the discretion of the owners. There are no public servants, who may tell what to write in charter or memorandum of association, as it happens in Ukraine.
When the registration is performed company is doing business and not reporting. Despite the fact that Americans often swear at their tax legislation, it is more transparent and simpler by times than Ukrainian legislation. And above all: you may always file accounting documents or pay taxes not leaving your office. At the same time, electronic reporting – is not Excel tables, but the electronic declaration acceptance system. And by the way it is created by private companies, who compete for the right to provide such a service to Internal Revenue Service.
They try not to bother startup during first three years of its operation. Generally it is considered normal if during this period startup remains unprofitable business.
The USA has types of companies that allow founders to use their profit/loss as a part of their own declaration. This solves the problem of excessive reporting and affords the founder to cut his own income due to the losses of new company.
Unfortunately, this form of corporations is not available to foreigners. Moreover, American companies may cut the income by the amount spent on new product development (up to its commercial output), on organization of business. In other words, actual costs for the creation of business and product, rather than only costs for its activity.
What shall be changed in Ukraine for the startups wish to be registered here? It’s a challenging question. Key problem of Ukraine – vast number of public servants, who shall do something. Thus they are doing whatever they want, herewith having quite a lot of power. As a comparison, neither the federal nor the state tax service can do anything without a court decision, besides that both parties to litigation pay equal amount for the court. Considering this, the US tax authorities bring a suit only when they are 100% sure in their claims. After all, lawyers are as costly for them as for private companies. If there is no supreme confidence in their rightness, they will definitely try to settle all issues through the pre-trial process. This is an equal relationship. Therefore, based on our experience, we can say that existence of real independent judiciary in Ukraine, even with the current legislation, will give the entrepreneurs much more opportunities to do business.