Nearly every tech startup that was founded and is being developed in Ukraine is legally registered elsewhere.
The stark truth is that if they weren’t, they would never have been able to do global business from Ukraine.
Take Depositphotos, a microstock photography agency that has attracted $8 million in investment from backers like the European Bank for Reconstruction and Development. Well-known abroad, the agency was founded by Dmitry Sergeev in Kyiv in 2009 – but he immediately registered the business as having its main office in Florida.
As Sergeev says, his company has always been de jure American, but de facto Ukrainian.
Depositphotos is not alone. A registered office in America has been a ticket to success for a number of star Ukrainian tech firms, like Petcube, Grammarly, Readdle, MacPaw, Ring and up-and-coming PassivDom, Senstone and SolarGaps among others. With Ukrainian legislation often cumbersome or unclear, and foreign investors and partners cautious of corruption, many see it as the only way.
Functioning legislation
With only a Ukrainian presence, startups can’t find investors, work with foreign banks and clients, and protect intellectual property, so they have no choice but to register themselves abroad, Ukraine’s startup community says.
Local laws are difficult to work with and are not trusted by foreigners, while gaps in legislation on subjects like intellectual property make international investors worried over the security of their investments.
But the solution – register in the United States or other well-developed Western countries — is straightforward: pay a few thousand dollars, and engage the help of lawyers or companies like Atlasm or Stripe.
When the process is done, most keep their local Ukrainian offices as the core of their research and development operations — but operate according to U.S. or European laws.
By working this way, says Depositphotos’s Sergeev, his company has managed to “build a global business from Ukraine.”
Valentine Hrytsenko from hardware manufacturer Ajax Systems, which makes alarm and security systems in Ukraine, agrees with Sergeev. His company includes foreign legal entities as well.
According to Hrytsenko, by setting up a company overseas and using their well-written laws, a company can secure its intellectual property — ownership rights, domains, code, and trademarks.
It can also establish better relations with foreign partners and investors that tend to have less trust in Ukraine’s legal system. Used to the rule of law in the West, these partners will often either ask Ukrainian companies to move, or will simply find a more convenient partner.
The advantage of being registered abroad also means access to secure and stable financial systems — reliable banks and online financial tools such as PayPal.
So Ajax Systems legally is both European and American, while all its development operations take place in Kyiv. Living in Ukraine, Ajax’s heads can stay close to the company’s main market, the EU. And now that Ukraine has a visa-free regime with the 28-nation bloc, the company’s management can easily travel abroad business trips.
Moving out of need
While for Ajax and Depositphotos, registering a business abroad was a strategic move, for legal-tech startup PatentBot it was a necessity. Its founder Valentine Pivovarov said PatentBot couldn’t have provided services in the United States had it not been registered there.
“This was just a matter of formality for us,” he said. His company makes a chatbot — an artificial intelligence program that conducts a conversation with a client. PatentBot’s chatbot helps users to register a trademark. To provide such a service, the company needs to be inside the jurisdiction of its target market.
Though PatentBot moved out of necessity, Pivovarov says he’d run his business in accordance with U.S. laws anyway.
“After all, unfortunately, a company from Ukraine or from other (underdeveloped) countries are always perceived lightly. So it’s just a universal international practice for companies from these countries to have a legal entity registered in the U.S. or, say, in Britain,” he said.
For some other companies he knows it’s a matter of cooperation with investors: “Some investors demand to have a company registered in a jurisdiction that’s optimal for them. Ukraine usually is not on such a list.”
Apart from legal requirements, having a global image, and partnering with investors, Pivovarov sees another advantage to registering abroad: it helps startups understand their target market.
Besides the United States, says Pivovarov, he plans to register PatentBot in mainland China to provide services there as well.
“This way, it’s also possible to understand the culture and work in the same time zone with your investors,” he said.
Meanwhile, Pivovarov keeps operations and development going in Ukraine — which means paying attention to another set of laws. The company “hires people and pays taxes in accordance with Ukraine’s laws” as well, says Pivovarov.
Expanding abroad
Overall, there are many reasons to move, say Ukraine’s tech industry players. Some focus on the legal side — others simply envision themselves as more global players.
Depositphotos’s Sergeev thinks that when a business grows, it’s inevitable that it will have offices in other countries, since eventually it will need to hire foreign professionals.
“We’re opening offices in the EU, since we need professionals from Europe who we can’t find in Ukraine, and who are more willing to go to Europe than to Ukraine.”.
Ukrainian startup Grammarly, which in 2017 attracted $110 million in investments, has three offices: in San Francisco, New York, and its biggest — in Kyiv. Its co-founder Dmytro Lider said the company’s move to the United States was logical, opening its first overseas office in California.
“We wanted to bring additional expertise onboard, the expertise of people with the experience of building international companies beyond the scale we knew,” Lider said, adding that San Francisco Bay Area is “where the tech world is boiling.”
According to Lider, San Francisco was ideal for his startup to build a network, learn about new opportunities, and find potential partnerships.
“That is how you do global business. We were not creating a product for the Ukrainian market only. From the very beginning, we had our sights set on global opportunities. And so we had to be in the jurisdiction that made more sense for building a global business,” Lider said.
“It’s neither good nor bad, it’s natural.”
The Kyiv Post’s technology coverage is sponsored by Ciklum and NIX Solutions. The content is independent of the donors.
