Rules to Use Finance & Law in Tech Company: Insights for Tech Owners

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By Vladimir Linev, CFO at Reliz

Due to the rising rates of central banks around the world, companies are often forced to change their financing strategy. In this article Vladimir Linev, CFO at Reliz, explores the intricate web of financial considerations, including funding strategies, revenue models, and budget allocation, that app and tech companies must navigate to remain competitive.

Rule 1: Adapt to thrive in funding today

The shift in ECB rates to 4.5% has prompted institutional lenders, once reliable sources of funding, to reevaluate their policies, making financing acquisition notably arduous and costly. In some countries loans now carry interest rates as high as up to 15% per annum.

In response, contemporary financing methods are gaining traction. Venture capital, for instance, is on the rise, with European tech companies witnessing a surge in investments. Despite economic fluctuations, significant ventures, such as Revolut’s Series E funding round in 2021, underline the industry’s resilience and potential. Moreover, the investor landscape is diversifying, encompassing corporate entities, private investment funds, and international financial institutions. Strategic partnerships and mergers and acquisitions are on the rise, serving as catalysts for business expansion both domestically and abroad. Additionally, alternative funding avenues, like crowdfunding and ICOs/STOs, offer direct access to a broader investor base.

Sustainability and social responsibility also play pivotal roles in attracting investment, with technology startups championing environmental standards and societal well-being enjoying heightened investor interest.

Rule 2: protect your assets

Legal challenges are becoming more prominent, and we have faced many legal challenges in our experience. I will list the most significant ones in my opinion.

  • One of the most significant for IT companies is the protection of intellectual property, as it is the most significant asset in this area. For example, if the corresponding NDAs are not signed by the developers, and the code is not duplicated in the company’s repository, one day you can easily see the same code in the company where the developer moved. Moreover, this company can license such software and take you to court on its own. The hunting of such key employees from competing companies can be called a modern kind of business raiding.
  • Regulatory compliance: Regulatory requirements, including data protection (GDPR in Europe), cybersecurity, industry standards and taxation (e.g. Digital services tax), can be complex and constantly changing, especially when dealing with the global market. As the operator of the Reliz DSP advertising platform, we monitor the legislation of more than 50 countries to change our policies in time.
  • Data privacy and personal data protection: With the tightening of data protection laws around the world, companies need to ensure a high level of protection of the personal data of customers, and employees and compliance with relevant laws.
  • And, of course, the other two huge layers of work that cannot be analyzed in one article are labour relations and tax legislation, and tax optimization. Only the most serious professionals can build a corporate structure so that it does not need to be changed for at least 5 years, but they also cannot predict the expansion of FATF lists, radical changes in local legislation and many other factors.

Rule 3: Choose your financial model wisely

Tech companies try to balance short-term financial stability and long-term growth, especially in the dynamic tech landscape. Here, technology companies are in many ways similar to a classic business. Reserves are created; long-term contracts are concluded; in the case of working with large clients, commercial risk insurance is purchased; A subscription model is used, which, combined with proper analytics of user behaviour, allows, similarly to long-term contracts, to have great confidence in how long these subscriptions will generate revenue and how this income will change.

With the rise of alternative financing like crowdfunding and venture debt, European tech entrepreneurs strategically choose the right funding model. First, you need to choose the model that suits your business. Only some businesses need funds raised and a public assessment. Many of the largest IT companies are still private and have never raised any funds.

If you decide to raise funds, study in advance all the options available to you: which fund is most suitable for you, at which stage it is better to apply, and what is necessary to attract attention to yourself. This can be done, for example, through the PitchBook and AngelList services.

Rule 4: Find the best hooks

Many models will allow you to expand customer interaction and earn more long-term income. I’ll name the first ones that come to mind.

First, it is necessary to expand the channels of communication with the client. You need to find those that best match your audience: mobile applications, push notifications, e-mails, social networks, messengers (it is advisable to divide direct communication, groups and channels, as well as the use of automation and robots), advertising integrations, retargeting, performance advertising, media, outdoor, TV advertising and so on. Each audience needs different channels.

Rule 5: Scale with confidence or what to bear in mind before scaling up

A cardinal principle is to refrain from attempting to reinvent the wheel in-house. Specialisation is key; focus on core competencies while leveraging professional services and SaaS solutions to streamline operations. By tapping into the expertise of these services, which invest significant resources in optimizing functionalities, companies can operate more efficiently and cost-effectively.

  1. Conduct thorough research on the tax laws and regulations in each country of operation. This includes understanding corporate tax rates, digital services taxes (DST), value-added taxes (VAT), and other relevant local taxes. For example, use Avalara which offers automated tax compliance software that helps businesses understand and calculate the correct taxes for various jurisdictions, including VAT, GST, and sales tax compliance.
  2. Crafting a tax-efficient structure, potentially leveraging favourable tax treaties and regimes in different jurisdictions, requires collaboration with tax professionals specializing in international taxation. Platforms like KPMG Spark provide online accounting services with access to tax professionals who can advise on structuring the company to optimize tax liabilities across different countries.
  3. Robust compliance systems are essential for maintaining high standards of governance and regulatory adherence. Diligent Compliance offers software tailored for SaaS companies, streamlining compliance efforts and upholding international tax laws and corporate governance standards.
  4. Leverage international tax treaties. Through its global tax compliance and reporting software, Thomson Reuters ONESOURCE helps companies manage compliance with international tax treaties, including withholding tax rates and treaty benefits.
  5. Regularly review and update transfer pricing policies to reflect changes in the business and regulatory environment. ExactEra: Offers AI-driven transfer pricing software for creating compliant documentation and strategies, ensuring adherence to international guidelines.
  6. Given the rise of DSTs targeted at tech companies, identify how these taxes affect your business in specific jurisdictions and plan accordingly. Vertex provides tax technology solutions that include DST calculations, helping companies manage the complexities of digital services taxes in various jurisdictions.
  7. Access to up-to-date information on international tax regulations and changes is paramount. Tools such as Bloomberg Tax & Accounting provide comprehensive resources to stay abreast of regulatory developments.
  8. Choose an ERP that will be from the box adopted for the geos you work with. Every country has its very specific regulations so can’t recommend anything here.

And what’s important – keep doing your business. Don’t try to solve problems that are not directly in your specialisation, trust professionals and professional services. When your product is 100% ready and clients will love it, you can start to replace some third-party SaaS solutions with your own, but not before it.

Disclaimer: This article contains sponsored marketing content. It is intended for promotional purposes and should not be considered as an endorsement or recommendation by our website. Readers are encouraged to conduct their own research and exercise their own judgment before making any decisions based on the information provided in this article.

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