How To Start Your Silicon Valleyesque Startup In China

China high tech lawyers

Very informative post, Silicon Valley-Style Startups in China: The Next Wave [link no longer exits], on getting a startup going in China. The post is on a recent Asia American MultiTechnology Association dinner where a number of clearly qualified people spoke on China startup information.

I really liked the following advice on whether to use or avoid government:

There really are two schools of thought. The first school is to avoid, and stay under the radar screen of the government. For some areas, like internet and wireless, you can start out small enough to fly under the radar. The second school is to use the government as a strategy to secure grants, land, financing, concessions. This makes more sense when there is larger capital to be raised….

However, I was less thrilled with this advice regarding how to get started:

Getting started can be easy. You can create a special purpose vehicle in BVI or Cayman Island for no more than a few thousand dollars. It’s a cost-effective way to get started. Then do your fundraising. It’s easy to start with a representative office in China. Can be fast and easy.

If you are on a shoestring budget, you can just set up a cheap offshore structure to do preliminary activity. There is no need to set up a Wholly Owned Foreign Enterprise (WOFE). Don’t let people tell you that it costs $80k to set up a WOFE, you should be able to set it up for about $25k. Should be comparable to setting up a business here in Silicon Valley. There is also a registered Capital requirement of at least RMB100,000.

Not sure if this was actually the advice given, or just how it was recorded, but it definitely goes against the grain of how things really should be done in China, particularly in light of all that has transpired in the last few months.

One should be very wary of going into China as a representative office just because it is initially cheaper than a Wholly Foreign Owned Entity (WFOE). Representative Offices are simply not legal for all sorts of activities, including making money within China. It is also rarely cost effective to start out as a Representative Office and then have to switch quickly to a WFOE.

I also do not like the advice of going into China without a business entity. There are all sorts of reasons not to like this, but two spring quickly to mind. The first is that it will almost certainly be illegal, which could lead to your business being shut down soon after it starts. My firm received a call from an American company just last week that had been ordered to shut down for not having registered a company. As everyone knows, China has really stepped up its law enforcement against foreigners in the last few months and now is not the time to be starting an illegal business. We are even starting to hear of people getting hit with big fines for operating without a license and put in jail for a few weeks and then deported.

The second is that having a business entity in China can be crucial for securing a China Z employment visa. I agree that one should not be paying $80,000, but I also think one should not have to pay even as much as $25,000 either. It is somewhat misleading to say the minimum capital requirement is at least RMB 100,000. That is the written minimum for all of China, but in many of the most desirable cities for foreign businesses, like Beijing and Shanghai, it is virtually unheard of to get a WFOE going for anything less than USD$100,000 in capital.

What are you seeing out there by way of WFOEs and Joint Ventures and Representative Offices?  I can tell you that our China corporate lawyers are doing at least ten times the number of WFOEs than any other entity.

2 responses to “How To Start Your Silicon Valleyesque Startup In China”

  1. Thanks Dan for the helpful comments. Its possible that I misreported. I’m sure you would agree that legal strategy is highly situational in all places, especially China. It sounds like in many cases a Rep Office is just a dead end, and ends up wasting more money. Most entrepreneurs try to figure out how to minimize legal cost upfront during the pre-financing period where the entire company is bootstrapped. Thanks again, and I added your point about not having any structure to the original post!

  2. foreign it startups in China are are very well advised to follow local laws and regulations and do proper market research before entering. many telecom services are restricted or even prohibited. most BTV (Basic Telecom Services)in category 1 & 2 for example are. these include
    Category 1
    Fixed Communication
    Cellular Mobile
    Satellite Communication
    Data Communication
    Category 2
    Trunked Radio Communication
    Wireless Paging Services
    Satellite Communication
    Data Communication
    Network Access Services
    Domestic Communication Infrastructure Services
    Network Hosting Service
    Even VATs Value-Added Telecom Services are heavily restricted for WOFES such as:
    Category 1
    Online Data- and Transaction Management
    Domestic Multi-Direction Communication
    Domestic Internet Virtual Private Network (VPN)
    Internet Data Center (IDC)
    Category 2
    Storage Re-transmission
    Voice Mailbox Services
    X.400 Email Services
    Fax Storage Re-transmission
    Call Center Services
    Internet Access Services
    Internet Information Services
    A VATS Licence for example requires:
    Registered Capital:
    National / Interprovincial min. RMB 10 m.
    Intraprovincial min. RMB 1m.
    Foreign Equity Ratio Limit: 50%
    Qualification Tests for Principle Foreign Investor:
    Good Performance and Operation Experiences.
    Establishment
    (approved more readily than BTS and more easily on local VATS operation)
    Telecom Operating License
    Limited to 5 years
    use within 1 year annual inspection
    this also includes profitable Internet Information Services (“IIS”)from the “2000 regulation on iis.
    Category 1: requires License for VATS (Service License) + Registration
    Profitable IIS: “Provision of IIS with charge of payment of information or of webpage designing.”
    Examples: Advertising, Web design, Application Development, Renting Space on W3-Servers, entrusted to server upkeep, “E-Commerce”, etc.
    this is in accordance to the Telecom Service Classification Catalogue (effective April 1, 2003) and the latest Foreign Investment Industrial Guidance Catalogue (effective Dec. 1, 2007).
    not to forget the law effective from january 31st 2008 that any site hosted in mainland china that provides video programming or allows users to upload video must have a permit and be either state-owned or state-controlled.
    if you want to do serious business in china a company on the caymans might sound tempting but it will get you nowhere in the longrun.

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