Overseas Partners Are Risky Business

Last Updated May 16, 2011 11:33 AM EDT

Overseas Partners are Risky BusinessIf you're considering or already involved with an investment, partnership, customer, or employment with an overseas company, beware: the risks are probably far greater than you realize.

You see, U.S. legal protection doesn't extend to other countries, a fact that few consider when a job, customer, or investment capital is on the line. And ignoring a red warning flag like that can cost you or your company big-time. I've seen it happen time and again. Here are some real-world anecdotes to consider:

  • Just last week Yahoo disclosed it was blindsided by a major restructuring of Alibaba Group to meet new Beijing regulatory requirements. That means Yahoo's 40 percent stake in the privately held company - valued at $10 billion by some analysts - may now be worth considerably less.
  • Likewise, U.S.-based startups and entrepreneurs considering investments from overseas firms rarely consider that the due diligence process will necessitate revealing details of intellectual property - patents and trade secrets. U.S. patent disclosures and non-disclosure agreements are virtually useless and unenforceable in most countries.
  • This isn't just an Asian phenomenon, either. I know of several cases where U.S.-based executives of European companies had their bonus agreements "rewritten" after the fact, were told that their equity agreements simply were never actually filed, or were owed large sums they couldn't collect after termination or the company went under.
  • It's not uncommon for companies in some countries to shut their doors after receiving large product shipments, leave U.S. vendors or partners holding the bag, and emerge later as a different company with a different name. Even with local attorneys, you'll rarely get anywhere in their court system.
In the Wall Street Journal, Beijing-based lawyer James Zimmerman, said the Yahoo situation "is a reflection of the challenges that foreign investors face as stakeholders in Chinese enterprises, where company assets and opportunities are at risk when operating in an environment that is opaque and with weak legal safeguards."

That said, whatever you're doing or attempting to do with an overseas company, here are four rules to minimize your risk and exposure:

  1. If it's employment you're after, the best case scenario is a large firm with operations in the U.S. Then they fall under the jurisdiction of the U.S. court system. If it's a startup or a smaller company, have a good U.S.-based employment attorney negotiate your deal and work with the firm to ensure that employment and stock agreements are in writing, properly executed, and if at all possible, under jurisdiction of the state you live in.
  2. In all cases, keep the company on a "short leash" by invoicing frequently and negotiating short and favorable payment terms. The same goes employees and frequency of salary and bonus payments.
  3. In terms of intellectual property, there's one rule and, fair warning, it's ugly and you're not likely to read it anywhere else, but it is true: Patent disclosures and non-disclosure agreements will only help you with companies that would never steal your technology to begin with. If you've got a choice, don't give away the family jewels. I could write a book about this point alone.
  4. When it comes to investments from overseas firms, it's always best to have a U.S.-based venture company lead the funding round so your IP disclosures will be minimal and the legal side will be covered. If, like Yahoo, you're investing in an overseas company, don't have a Yahoo like Jerry Yang negotiate the deal and sit on the board. That's just a recipe for disaster.
As for my fine international audience, I know this post is from a U.S. perspective, but it's nothing personal and it is what it is. The bottom line is I've worked with a large number of overseas firms with mixed results. Perhaps the same is true from your perspective. If so, I'd love to hear about it.

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