The German Business Climate
The German American Business Association (GABA) recently organized a seminar with executives from Global Upside, K&L Gates, Norton Enterprises, Datameer and Datavirtuality to talk about Germany’s business climate and things companies should keep in mind when expanding into or outside of Germany. Below are the top four takeaways.
Stringent Employment Laws
The concept of “at-will” employment does not exist in Germany (or anywhere outside the US) and failure to meet statutory obligations can be very risky for US companies, especially when it comes to employment terminations.
“Companies should be extremely cautious about terms of employment and document them via robust employment contracts. Often companies extend a US Offer Letter and get a false sense of security. It’s a very risky situation to be in. Secondly, be cautious about hiring contractors but treating them as employees. The activities of that contractor, their title, even their business card can be interpreted as full-time employment in the court of law,” said Ragu Bhargava, CEO of Global Upside.
Intellectual Property (IP) Rules
Germany has specific rules for transfer of intellectual property rights between employers and employees and it is generally very difficult under German law to transfer rights of an employee to the employer.
For German startups moving to the US, it is also very important to plan for movement of IP from day 1 and plan for structure whereby they can move the IP to the US at a low cost or have the flexibility to later move it to the US at a very low cost.
“We have a client now that will be valued in the neighborhood of $20 million. All the IP is residing in Germany and the lead investor is insisting that they move the IP to the US. There is a $4 million tax hit to do that now and it is becoming an impediment. If they had planned this 18 months ago, they would have been able to move the IP for $50,000. It’s a planning and a timing issue,” said Lars Johansson, Partner at K&L Gates LLP.
Legal Entity Setup
The process to establish and operate a company in Germany can get complicated and is time consuming. You need a proper legal setup to be able to make any hires so plan ahead to ensure there are no delays. Companies also often need guidance on issues like import controls and other tax and business protections that they can benefit from. Numerous taxes may be unfamiliar to U.S.-based businesses such as value-added tax, “trade” tax and solidarity surcharges. Companies will need insights from experienced partners.
The culture is different on the other side of the Atlantic. Germans, by nature, are more conservative and risk adverse. This cultural difference can make it difficult for entrepreneurs to raise capital in Germany. More businesses are financed by banks in Germany, not necessarily by venture capitalists like they are in the US. “It can be difficult to convince a bank to finance a new venture,” said Stefan Groschupf, CEO and Founder.
Here are some pictures from the panel held on Thursday, June 9, at the Runway Incubator in San Francisco.