By Rita Okoye
Experienced professional in business law, Abdulrasheed Ijaodola, in an article titled “Business Considerations for African Startups Incorporating in the U.S.”, has outlined critical business considerations for African startups looking to incorporate in the U.S., particularly in Delaware. He highlights that while Delaware is a favoured jurisdiction due to its straightforward process, many founders skip professional advice, resulting in costly errors.
According to him, founders often need to be present in the U.S. to engage with investors and tap into the U.S. market. However, securing the appropriate visa has been a major challenge. The Department of Homeland Security’s new International Entrepreneur Parole (IEP) program aims to address this issue by allowing startup founders and their spouses to work in the U.S. for up to five years.
He explains that the IEP program targets entrepreneurs whose startups show potential for rapid growth and job creation. Eligible startups must have been formed within the last five years and demonstrate significant economic impact. He further elaborates that up to three founders per startup can apply, each holding at least a 10% ownership stake (which can be reduced to no less than 5% after approval). These founders must play a central role in the business’s operations and growth.
Funding is a crucial aspect of the IEP program. He points out that startups need substantial funding within 18 months preceding the application, with at least $264,147 from qualified U.S. investors. Qualified investors are typically U.S. citizens or lawful permanent residents with a track record of investing in early-stage companies. Alternatively, startups can qualify with at least $105,659 in government grants or awards from entities supporting entrepreneurship.
He further emphasized the need for a comprehensive application to USCIS, including evidence of the startup’s formation, the entrepreneur’s ownership stake and role, and documentation of the required funding. The review process involves assessing the startup’s scalability, economic impact, and job creation potential.
He considered other critical considerations for African startups incorporating in the U.S.:
1. Exchange and Contribution of Equity: He advises that startups reorganizing into the U.S. should ensure that the exchange and contribution of equity are properly done, especially through a tax-free exchange and contribution of equity compliant with U.S. tax laws.
2. 83(b) Election: He highlights the 83(b) election, a U.S. tax provision that allows recipients of equity subject to vesting to elect to pay income tax on the equity’s fair market value at the time of grant rather than at vesting. He stresses that this election can save significant taxes and must be made within 30 days of the grant date.
3. Equity Incentive Plan: According to him, every equity issuance in the U.S. must be registered with the SEC unless an exception applies. An exception applies for equity issuances pursuant to written compensation plans but many African startups overlook setting up such plans, risking non-compliance with securities laws. He recommends establishing an incentive compensation plan immediately after incorporation.
4. Corporate Transparency Act: He notes that this act, effective on January 1, 2024, requires certain entities to report their beneficial owners and company applicants. Newly formed entities must comply within 90 days, while existing entities have until December 31, 2024. He warns that non-compliance can lead to civil and criminal penalties.
5. Fiduciary Duties: He underscores the importance of understanding fiduciary duties, which require corporate directors, trustees, and officers to act in the company’s and minority shareholders’ best interests. He advises that adherence to these duties is crucial to avoid legal issues.
Incorporating in the U.S. offers significant opportunities for African startups but requires careful consideration and compliance with various legal and regulatory requirements. He recommends seeking professional advice to ensure a successful transition and operation in the U.S.