Although American venture capital investment firms and entrepreneurs from abroad are disappointed by Congress's failure to enact the long-promised Startup Visa, several existing visa options can meet much of their needs.
The proposed Startup Visa
In June 2013, the Senate passed S.744 and the proposed Startup Visa (or EB6). The House Judiciary Committee in May had already voted out of committee H.R. 2131, and its version of a Startup Visa. It appeared that the process was moving forward, but to date the House has not yet voted on either H.R. 2131 or S. 744. Representative Joe Garcia (D-FL) introduced H.R. 15 on October 2, 2013, which includes the Startup Visa provisions, but that bill has sat in subcommittee since December. The likelihood of a new Startup Visa becoming law before the 2014 mid-term elections seems increasingly unlikely as the 2014 election season rapidly approaches. It seems more likely that the House will deal with immigration closer to the 2016 presidential elections, if at all.
Contrary to some reports, this is good news for venture capital investment firms and entrepreneurs from abroad. The proposed Startup Visa contains a number of fatal flaws that would have made it impractical, as currently proposed, for most of the startup businesses it is intended to help.
Unrealistic job creation requirements for startups
Both the Senate and House proposals require the creation of between three to five jobs for US workers, and only jobs held in the US by US citizens or lawful permanent residents would count. The jobs would have to be full-time. S.744 would require the salaries paid to be at least 250 times the federal minimum wage.
The problem is that this requirement to create full-time employment opportunities with guaranteed compensation levels ignores how startups actually work. It is common practice for founders and those early to join a new venture to invest their sweat equity in return for stock options, rather than be salaried employees. New ventures commonly contract with others to keep their employee count and fixed costs low. And limiting the count to US citizens and residents fails to credit the important role of foreign nationals lawfully working in the country on nonimmigrant visa status, even if they are already in the process of immigrating.
Investment/revenue requirements too high for startups
Both versions of this legislation propose requiring a minimum level of investment in -- or the generation of revenue by -- the new venture of between $500,000 and $1 million, with annual adjustments for inflation. This requirement would make the Startup Visa unavailable to most new ventures during the very startup phase that the new visa is designed to support. The venture would need to be well enough established to have raised the investment required or, harder still, to have achieved the annual revenue required.
Impractical investment source/structure limitations
Additional requirements regarding the source and structure of the investment would limit the options of American venture capital firms and might result in control of the venture being relinquished earlier than a business might plan.
Furthermore, not all venture capital firms and angel investors would have equal access to the proposed Startup Visa. Individual investors or firms not majority owned by US citizens and lawful residents need not apply. Also not considered are investments by the immigrant investor, certain relatives or companies substantially owned by the immigrant.
Residence would be granted either on a conditional basis initially, or only after residing and operating the startup in the US for at least two to three years. This requirement might limit a startup's needed flexibility to reorganize through merger, acquisition or other restructuring to more quickly grow the business. Otherwise, the foreign entrepreneur's visa status could be lost.
Existing visa solutions for startups
The United States Citizenship and Immigration Services' (USCIS) Entrepreneur Visa Guide, available athttp://uscis.gov, is the agency's official resource on existing visas for entrepreneurs. The information there is limited, however, and the promise of the agency's Entrepreneur in Residence program when it was announced at a 2012 Silicon Valley summit remains largely unfulfilled.
The good news is that the US already has viable visa solutions to encourage startups. Existing US law provides nonimmigrant visa categories that may allow foreign entrepreneurs to start a new business in the US, as well as immigrant visa categories for foreign entrepreneurs who have already started or are about to start a new business in the United States and wish to immigrate permanently. Although not perfect, these visas have long been available and used successfully. The following are just a few of the visas that already exist today and require no action by Congress.
- O-1 and EB1A Extraordinary Ability Visas
The O-1 nonimmigrant and EB1A immigrant visas for individuals of extraordinary ability have been available for more than two decades. The documented personal accomplishment required for the foreign entrepreneur is high, but both visas reward such individuals with greater flexibility than the proposed Startup Visa. Residence is permanent, not conditional, with no minimum investment, revenue or job creation required.
- L-1A and EB1C Multinational Manager/Executive Visas
The L-1A nonimmigrant and EB1C immigrant visas for multinational managers and executives have both been available even longer than the O-1 and EB1A visas. Although there is no specific job creation requirement, there must be a sufficient number of subordinate employees to show that the foreign entrepreneur's work is primarily in a managerial or executive capacity. There is much greater flexibility regarding the visa status of these subordinates -- they may be US citizens, permanent residents, nonimmigrant visa holders or even individuals employed outside the US. No minimum investment in the US is required; however, the company must be doing business in the US with either sufficient income or net current assets to pay the wages offered, and those wages are not required to be at any specific level. The L-1A is expressly available to startups, while the EB1C is only available after the company has been continuously doing business in the US for at least one year. Perhaps the biggest limiting factor is the requirement that the foreign national must have been employed outside the US at a related company in a managerial or executive capacity for at least one of the past three years. Residence is permanent, not conditional.
- E-2 and EB5 Investor Visas
Also available are the E-2 nonimmigrant and EB5 immigrant visas, designed specifically to encourage investment in a new or existing US business.
The E-2 nonimmigrant visa does not have a specific minimum qualifying investment, rather the law requires only that the investment be substantial. The law considers not only cash invested, but also intellectual property, equipment and other non-cash property. The visa is available to investors with a 50 percent or higher personal investment, as well as to minority owners and individuals with no ownership interest, so long as they will be employed in a supervisory capacity or bring skills essential to the business. A significant limitation is that the business must be at least 50 percent owned by citizens of a country that has a bilateral E-2 treaty with the US, and the visa applicant must be a citizen of that country as well. (A list of those countries can be found on the US Department of State website.) E-2 treaties exist with a large number of countries, but not some of the countries that might best benefit startups, such as India and Israel. Even if a treaty is available, the high percentage of foreign ownership required for the E-2 limits investment/ownership structural options for American venture capitalists.
The EB5 immigrant visa requires no treaty and is therefore generally available to citizens of all countries. Further, this allows much greater flexibility in how the investment and ownership are structured. Cash and non-cash property invested are both considered, but there is a minimum qualifying investment required for the foreign entrepreneur. An investment of $1 million by each foreign entrepreneur seeking to apply is generally required, but that amount is reduced to $500,000 for investments in areas with unemployment 150 percent above the national average, or in rural areas targeted for employment creation. Americans can also invest, with no minimum percentage ownership requirements. At least 10 full-time equivalent jobs for US workers per EB5 applicant must be created, but there are special rules for investment in troubled businesses that allow the jobs saved to be considered as well. Residence is initially granted for a two-year conditional period, but thereafter becomes permanent with proof that the required number of jobs were created and the required investment remained at risk in the enterprise.
- H-1B and EB2 or EB3 Professional Visas
These are the visas that most businesses in the US rely upon to obtain skills not readily available. Although not designed specifically for startups, all three of these visas are regularly and successfully used by them.
The H-1B nonimmigrant visa allows foreign professionals to be employed in their profession in the US. A relevant bachelor's or higher degree from an American university or the equivalent is required, as is an offer of employment with wages and benefits at least equal to the average paid to similarly employed US workers in the same region. The compensation requirement limits the ability of startups to bring on foreign professionals with stock options in lieu of wages, regardless of how the American employees are paid. Notwithstanding the fact that the USCIS lists the H-1B as part of its Entrepreneur in Residence program, the agency will refuse to grant the H-1B if not satisfied that others will sufficiently control the entrepreneur's work as an employee, which limits the roles available. Since 1990, only a limited number of new H-1B visas are granted each year. This quota is consistently inadequate to meet demand, with no new H-1Bs available for most of each of the fiscal years since 2004. This quota problem has not existed for the similar TN, E-3 and H-1B1 professional visas, but those are only available to citizens of Canada and Mexico (TN), Australia (E-3), and Singapore and Chile (H-1B1).
The EB2 immigrant visa is for professionals with graduate degrees from an American university or the equivalent, while the EB3 is for professionals with undergraduate degrees or at least two years of relevant training/employment experience. For both visas, as with the H-1B, there must be a sponsoring employer with the ability to pay at least the average paid to similarly employed US workers in the same region. This limits how compensation to the entrepreneur can be structured. In addition, the employer must already have the financial ability to pay the wage, rather than rely on future financial success, limiting the availability of this visa strategy to better funded startups.. The Department of Labor (DOL) must certify that the sponsoring employer was unable to locate US workers qualified, willing, and able to satisfactorily perform the job offered. The DOL tends to question whether the recruitment efforts required for certification were in good faith if the immigrant worker is a founder, owner, director or officer of the company, or has a relative in such a position. Certification is not impossible, however, due consideration must be given to the role of the entrepreneur to satisfy the agency's concerns.