Taking the transatlantic leap
UK market conditions are kind to fintech startups. London is a global financial capital, and the regulatory environment is supportive. From an early stage, however, UK fintech companies frequently feel a strong pull to expand to the US, especially New York. Many companies find that their key clients are in the States and anticipate strong US demand for their products and services. Additionally, they often seek investment from US venture capital firms who want them “on the ground” with a founder present.
What key challenges do these companies face in coming to America?
First, UK fintech companies will find a substantially more complex, harsher financial services regulatory environment than in the UK. US regulators do not make special accommodations for startups, and oversight and enforcement are fragmented among numerous different agencies.
The tax environment also is more complex, with a variety of national, state and local taxes. Combined US corporate income tax rates are much higher than UK rates, often exceeding 40%. Consequently, it is critical to establish a tax-efficient corporate structure and a system for ensuring US tax compliance.
Further, the liability risks in the US are considerably higher. Unlike the “loser pays” approach in the UK, each party to US litigation typically bears its own costs regardless of outcome. As a result, litigation – or even the threat of it – frequently is used as a business negotiation tool in the US, even where the claims may be weak. Intellectual property litigation (whether from competitors or so-called “patent trolls”) and claims by disgruntled former employees are particularly significant risks. Regulatory enforcement risk also is greater in the US, not just in financial services but also in areas such as tax, employment, and consumer protection.
Finally, finding the right people, and successfully transferring company culture, can be challenging. Early-stage companies typically must choose between building US operations with relatively unfamiliar local hires or relocating key leaders from the UK.
These challenges all can be managed, but require careful advance planning before you leap.
Partner, Fried Frank