Addressing legal challenges for hyper-growth companies in Silicon Valley

Silicon Valley is a unique and fascinating place to be a lawyer and to support, as well as to observe, the companies that emerge and expand across the world.  One particular feature of many companies from Silicon Valley is that they very quickly increase in size and revenues, numbers of customers, and geographical reach.  This “hyper-growth” brings with it opportunities but also many challenges.  Some of these challenges are the same as for companies growing at a slower rate but these challenges can be amplified for companies in hyper-growth mode.  Whilst a failure to recognise and address these challenges may not ultimately prevent a company from expanding into new markets, it can certainly lead to problems which take time and resources to deal with further down the line.

In this article, which is the first of a series covering this topic, we focus on some of the local law and employment-related legal challenges that can impact hyper-growth companies and consider how they might be addressed.  Of course, there are many other related business and operational some of which we will cover in subsequent articles.

Local laws, regulations and regulators

Companies rapidly expanding into multiple new markets for the first time, particularly those disrupting existing markets, competition and consumer patterns, can attract attention quickly.  Of course, publicity and gaining profile is a good thing when launching into a new market but not if it translates into regulatory action or customer complaints.  Hyper-growth companies can often land on the radar of regulators quickly, but they are not usually prepared for this and neither is the regulator!

This is where looking ahead as much as possible into the local legal and regulatory issues can really pay dividends.  We know that it’s hard to get ahead of product teams and to get advanced warning of where they might be looking to launch but the more notice, the better.  Even a soft launch can be helpful in terms of testing out a market or customer opinion and getting legal and regulatory issues straightened out.

The first step is to identify local law issues and what their likely impact could be, which helps to assess risk and exposure to enforcement action and complaints.  Our Regulatory Outlook can help businesses to understand the range of issues that might be relevant for the UK.   Working out a strategy for dealing with any regulatory issues is key, and is an area where we help a lot of clients.  If a company is operating or planning to operate in a regulatory hotspot or grey zone, then the best approach is often to be proactive and engage positively with local regulators.  In our experience, it’s worth taking time to explain the product/service so the regulators are clear about what the company is doing.  This may raise the worst case scenario risk that a regulator could react badly, which might mean not being able to operate in that country at all. But if this is the decision that they would ultimately come to later down the line, then it’s better to know that up front before the company has invested more money, resources and time and to then decide whether to focus elsewhere.

If regulators raise any points, companies should take those on board and/or address the issues proactively.  All of this can go a long way in terms of minimising misunderstandings which sometimes lead to enforcement action. But this is a different approach for many US companies to that taken in their domestic operations.   Using advisers with local insights and relationships can really add value here to help run those conversations and the outcome run smoothly.

Secondly, for companies who offer consumer-facing products or services, or are looking to sell to companies who in turn are active in the consumer space, should be particularly mindful of launching into new markets.  In some countries, consumer groups, as well as regulators, not to mention individuals, can be especially vigilant in monitoring new products and, for example, reviewing terms and conditions to check whether they comply with local law.  Sometimes companies may not even yet have a presence on the ground but just the use or purchase of products or services by individuals located in those countries can trigger certain local laws.  Many businesses will take a risk-based approach and look to address local laws only once their customer base has reached a certain size.  However, hyper-growth companies typically would very quickly have a significant number of users meaning that they need to address local laws at a much earlier stage.  Corporate customers who operate in the consumer space will also be particularly sensitive and are likely to measure the professionalism of a new vendor by its approach to addressing these points.

Once the issues are known and once they have been addressed, it’s important to train local teams, product teams, sales and support groups, and other parts of the business. This will help them understand the scope of what is possible in a particular market – including how to localise the product/service for a particular market and how to keep out of market developments separate, in both cases to ensure that future developments don’t overstep any relevant boundaries or limitations – and when to ask for more advice.  Picking local team champions to act as points of contact in the time zone can help where this message has to be shared with lots of people across many countries.

People

Another key issue relates to people.  The importance of having the right people on the ground in new markets is nothing new (you can see our previous tips here), but hyper-growth companies face specific challenges here for a few reasons.  One of these challenges relates to having the right contracts and policies available and properly implemented.  At a time when companies are pulled in lots of different directions, any weaknesses in contracts and policies can be uncovered more quickly and employee relations can more swiftly unravel.  This can significantly impact on productivity, culture, the company’s reputation on the ground and its ability to attract the talent that it will need in a local market.

Hyper-growth companies need to take a much more organised approach to employment contracts and policies.  Sometimes this means looking at much bigger issues much earlier on, such as how local staff will be incentivised, for example, by bonuses or stock options, and how to manage any disparity in compensation at HQ compared to local offices.  On the contractual side, this isn’t always straightforward but in practice means assessing the types of employees that the company is employing locally and/or will employ in the future: for example, whether they will be sales or marketing consultants, software engineers, research and development, or customer support.  This question goes to the heart of why a company is setting up locally in the first place and is one of the initial questions we ask when clients talk to us about setting up in another country – what is the purpose of the entity and what are its objectives?  Is the company aiming to build out a new customer base or looking to bring in a team with specific technical expertise in a particular location?

Companies need to ensure that they have the right type of contract for the right level of employee and that it covers all of the relevant local law issues.  Getting local law advice and using standardised contracts is important not only to ensure compliance with local law but also to minimise high turnover of employees and to help the HR teams in US HQ to manage overseas workers more effectively.  Our recent Insight illustrates the key documents for the UK and Spain, for example.  It can help to minimise many of the questions and issues that can arise with the employees and, ultimately, avoid costly legal action if employees allege that their rights have been breached.  Policies may also need to be localised more quickly. Although this takes additional work, this can help to manage expectations with a growing workforce, who are distant from HQ, and can improve their understanding of what the company’s expectations are.  If company policy and guidance doesn’t keep up with the growth of a company, it can lead to inappropriate behaviours or failure to act in situations that could have serious repercussions.

Effective communication

With a large and fast-growing workforce, hyper-growth companies also need to ensure that there are clear communications between local country managers and HQ.  This is less of a legal issue in and of itself but can impact on how issues are identified and dealt with before they become significant problems.  Many Silicon Valley companies are used to being small or collaborative enough to talk something over in person or to have a quick meeting to get an issue quickly resolved.  Other companies will use internal communications platforms to help manage workflows and projects.  These ways of working don’t always translate (literally and metaphorically) into local markets and are not always very resilient when they have to be scaled to deal with the volume and 24/7 round-the-globe working environment that a hyper-growth company can experience.  Communication lines can become frayed at the exact moment when they are needed more than ever.   This can put the company at risk if remote teams are not interacting successfully with other parts of the business, and it can mean that knowledge and culture are not maintained.  Policies and training can help to instil good practices, as can robust but simple reporting structures.  Giving employees in remote and new business locations the chance to quickly and easily raise an issue, before it becomes a serious problem, can really make a difference.

Keeping an eye on local thresholds that trigger new requirements

Another issue for hyper-growth companies is that in some countries, such as Germany, there are certain thresholds (in terms of the number of employees) which will trigger the need for the company to take additional steps, such as appointing a Data Protection Officer, or in Germany and other countries, having to (potentially) deal with works councils.  Hyper-growth companies can exceed these thresholds extremely quickly and therefore need to know what the impact will be so that they can take appropriate action.

Don't store up issues for later

None of these issues is necessarily easy, quick or cheap to address but failing to do so, has the potential to not only jeopardize future investment, revenues, talent acquisition, corporate liability and insurance but can also store up cultural and reputational labels that can be hard to shift. This can ultimately make the difference between long-term success versus a short-term burst of growth but subsequent decline.