‘Goldmine’ advice for Indian founders willing to incorporate in US
Advice for Indian founders in US based on the collective experience of hundreds of YC India startups
Sandeep Srinivasa, a well-known figure in the startup ecosystem, has shared essential advice for Indian founders looking to incorporate in the US. His tweet thread, based on the collective experience of hundreds of YC India startups, provides crucial guidelines to avoid compliance pitfalls, particularly when dealing with the Foreign Exchange Management Act (FEMA). Here's a breakdown of his key points:
Indian founders cannot use services like Stripe Atlas or Deel to incorporate in the US. Doing so violates FEMA regulations, as Indian citizens must complete an Overseas Direct Investment (ODI) process—requiring approval from the Reserve Bank of India (RBI)—to legally own shares in a US company. Srinivasa emphasized that failure to follow this can lead to irrecoverable compliance issues. If founders have already used such platforms, the recommendation is to close the company and restart the process.
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Each Indian founder must create a Limited Liability Partnership (LLP) in India, as individuals cannot directly purchase shares in a US company without a lengthy process. This is commonly known as the "LLP route." The previously available gifting route is no longer legal, with severe consequences for non-compliance, potentially triggering Enforcement Directorate (ED) scrutiny.
ICICI Bank is recommended for processing the $20 ODI required for US incorporation. While the bank charges INR 15,000 for this, it is well-versed in startup founder needs, unlike many other banks unfamiliar with the process.
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The ODI process typically takes about two months, and founders cannot sign YC SAFE agreements or receive funds from investors before it is completed. Srinivasa stressed the importance of communicating this timeline to both Indian and global venture capitalists to avoid any compliance issues.
To avoid regulatory issues such as "round-tripping," founders should open a separate US bank account for Indian investors. These funds must not be mixed with funds from US investors. Srinivasa mentioned that there are options to manage this process and issue options in the US entity without breaking compliance rules.
Once the US incorporation is in place, founders should establish an Indian subsidiary (Pvt. Ltd.) and ensure it is bought out by the US parent company. This subsidiary will be the entity where founders and Indian employees receive their salaries, as receiving direct salaries from the US in India could lead to tax complications.
Once these steps are completed, founders may explore setting up put-call agreements between their US and Indian entities to raise capital directly in India. However, Srinivasa advises founders to consult with legal and tax professionals before proceeding.