Special things about doing business in Europe and the USA. How to choose a jurisdiction.
About the expert:
Alex Kornilov is a serial businessman with experience in sports data analytics, sports media, and gambling in general. He is the founder and CEO of BETEGY. The company offers an automated system of content creation for bookmakers and sports media. The service provides personalized visual content based on various data streams. The main clients are ESPN, Tipico, Ringier Axel Springer, Parimatch, Bwin, Yahoo Sports, Sportsbet.io, and Winners.net.
I have worked on some other projects besides BETEGY in different countries, but most of my experience lies within Europe. I’ve been working mainly in Poland since 2012. The difference is huge compared to Ukraine where I made my first steps in business. For example, LLCs (Limited Liability Companies) in Ukraine and Poland are totally different modes of doing business in terms of how easy it is. It’s much easier to launch something in Western Europe.
You should always try to choose a country with the best conditions for launching a business. You want to find a place where you may manage it as a whole or only its financial part. You do research in all possible areas and directions. There are cases when it’s better to launch an American company, but in some other cases you’d better choose a British, Maltese, or Cypriot one.
Some jurisdictions are good for attracting investors. Others are better for tax optimization, or copyright security, or GDPR that has changed the European business landscape completely. This is a separate topic actually. But in short I’d like to say that people have done a lot of things for lawyers to earn money. GDPR is supervised very well, fines may be issued in case of any mistake you make. So, if you don't want to work over all these things, you’d better do business outside of the European Union. One can find a place with the most convenient conditions and that is the place to go.
Laws and Recruitment!
Many factors affect you when you start a business. First of all you pay attention to the sources available for you. For example, one of the BETEGY’s investors is a German fund situated in Berlin. It means they have connections and their own office in Germany. It makes looking for new employees easier. So, I can mark the country as good for me. However, I have another investor from Switzerland and one more from London. Well, it seems to be alright but London in Great Britain so therefore British law applies. But in the other countries they have European law to follow. So, you start to play a mind game to make a short list of the countries to present to the board. It can actually be a very controversial issue where you should start a business.
The greatest difference between the British and European law is that the EU has business efficiency guarantee. You can often see authorized capital written below when you receive letters from German or Polish colleagues, because this is public information. If you are registered and don’t have debts then a European country guarantees that your business is solvent. You don’t need to do due diligence or an audit. If I, from Poland, sign a contract with German Ringier Axel Springer, I can be sure that my services will be paid, because the country will start inspection of RAS in case of something’s wrong. The same is for me.
The law in other countries can work in a totally different way. In the United States for example you can open a company in a blink of an eye, having only a cent. You don’t need any authorized capital. Everything’s much easier. Nevertheless there is a very difficult process of due diligence when signing a contract. It can last for three months or even longer. They check us, we check them. In this case the blame is all on you if a service you provide remains unpaid. The State guarantees nothing. The risks are higher in this legal system, so it’s you who must choose what’s more important for you. This is only one of the factors that affects you when you choose a jurisdiction.
It’s better to choose the British law if your investors are from the US or the UK. They deal with this system only. I’ve communicated with a Californian fund and they say that they will mark our company as a good investment, which means low risk investment, if they are investing in their own US jurisdiction. In case they will invest in a European country it will be considered a bad investment, which means high risks. It doesn’t mean that an investment is bad actually, it only means that they evaluate risks in this way.
This fund is a public venture company which should report all risks and investments. In case of investments in a jurisdiction abroad risks for due diligence get higher which demands more resources to close a deal. There are requirements for the venture companies in the United States that limit “bad investments” at 30% of all the deals made. That’s why you can attract investors from California to Poland, but it will be way harder. It’s easier to attract American finances being in the United Kingdom.
European law fits better to those who are going to look for investments from the European and Israeli funds. If you open a company knowing who is about to be the shareholders and who will invest money, it becomes an important help. It’s better to incorporate in the jurisdiction with more possibilities to find investors.
From an operational point of view having deals with different jurisdictions is more complicated than working within a particular one. Our first contract signed in the USA may be an example. We’d had 10% tax taken before the contract was signed. The clients were telling us that they couldn’t pay us before we could get a tax number in the USA. I couldn’t understand why we needed a US tax number if we were a Polish company. I started to sort it out, hired lawyers, called the US Chamber of Commerce. I spent about a month to find out why we needed the local tax number. The point was that we could pay an intellectual property import tax to the United States or abroad. No one could pay us because the IRS (Internal Revenue Service) didn’t allow them to transfer money to Europe. A client of ours asked us to get the local tax number. My mind was about to blow up, I couldn’t understand why I was supposed to get a tax number for the Polish company in the United States.
You know, how I managed to get it? I found a phone number and called them. They only asked for the name and address of our company. I got my US tax number right away with an official letter confirming it arriving within two weeks. Although I could use it even before receiving the letter. It took me five minutes and a month of research to understand why I needed it.
Now I already understand why, but back then I just decided to get it to avoid any problems. One way or another 10% is taken in case the money goes outside the United States.
Country’s reputation and branding
Another important point for a businessman is a country’s status. We had a subject called Differences of Cultures when I studied in Barcelona. There was a man who explained very well that every country has its own branding. Do you know, for example, what country is considered innovative in Latin America? It’s Spain. Funny, right? Spain is the most developed amongst Spanish-speaking countries in the EU. The technologies from there move to Latin America, that’s why they think so.
Catalan company SEAT has a motto which says Spanish passion, German engineering. Try to make it the opposite - German passion, Spanish engineering. What will you get? No one will buy such a car. Although there is a chance for it in Latin America.
It may be applied to any country where you start a business. If your business is connected to sports, then you have a reason to get closer to Switzerland, because FIFA and other international organizations have their headquarters there. If I sold some cups or watches or some other things it would be less important. But I sell services and integrate with big companies, so my company’s branding matters. It’s a face-to-face communication, some private arrangements, it’s not table-to-table. A lot of things depend on incorporation. People keep in mind whether we are a Polish company or a Swiss. It makes a difference for them. It doesn’t matter what exactly we do.
We’re launching another project now. There is a totally different structure of shareholders, another approach to everything, we need to find a country where we can attract more investments than in Poland. Everything's the same as in business connected with data analysis for football clubs. When we work with a football club we use very sensitive information: we explore strategy, tactics, communicate with coaches. They need to know for sure that all the data we receive, that relates to game tactics, for example, will be fully protected.
There is an issue. Where should we place our servers? What country has the correct branding? If I say that we are a Polish or a Romanian company, then British or German football clubs will be suspicious. They have some kind of prejudice, believing that no good football related company will have headquarters in Poland. Europe is divided into Eastern, Central and Western after all.
If your company is in England, you will see the goodwill rising. The same may be applied to Switzerland, because FIFA headquarters are situated in this country. Switzerland isn’t a member of the EU, so the problem related with data protection doesn’t exist. Although there are some other issues related to taxation, simplicity of working in a business area, intellectual property protection (Although it’s alright with that everywhere across Europe), correct branding.
Another important issue is how to attract investments. If you need to deal with a British or an American fund, it’s easier for them to work with the British companies. Israeli investors prefer the UK and Germany. Such things like country branding is always discussed seriously.
Conclusions applied to betting
So, it’s not enough to consider only financial data when launching a business. You need to think over all aspects. When I started 8 years ago I didn’t care much about it. Now this is a certain thing from the very beginning up to the exit strategy.
If we want to create a large 100 million company we need to understand right away what kind of roots it will have and where we will look for employees. For example, if we need a data scientist we need to take into consideration that quite a few people would like to move to Warsaw. Meanwhile many people will move to Berlin, London or Zurich easily. There are many specialists of this kind in Zurich by the way, because there is a Google office in the city. Thus it’s easier to find and hunt them.
However, the betting industry is strictly regulated and optimized, so the brand matters above all. It almost doesn’t matter where you are geographically - Curaçao, Virgin Islands or Isle of Man. Bulgaria and Romania are OK, too. There are many people from Eastern Europe who work in betting. Sometimes it works in another way in betting as in other areas. People consider those who want to work in Switzerland crazy because of high taxes!