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I plan to use a company in India that will be developing software for our company. They are willing to do this for equity. How can I legally structure the equity allocation for them? Is it as simple as executing a legal contract with them?

The outsourcing company is not a US registered company. It is registered in India.

What happens when there is an exit for our company? How do we move the funds for the equity to the company in India? Since the outsourcing company is not registered in the US, what are the implications?

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 I am smiling as I read your question. There is no way someone can answer the question and you can act on that answer. You need more than an answer, an ESSAY or a book =). I am sorry to be so blunt. Maybe one thing you can do is split your question in smaller domain questions, and put the same introduction text in it. And if you are asking this to avoid paying a lawyer, I will strongly suggest not to do that unless this is a very very small deal. I hope this comments helps. Thanks – Geo♦ Nov 9 at 19:53

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I'm not an expert in this but have some info that might help. If you have a US corporation and you plan to give some of the shares to the Indian provider, there may be tax implications for you and some reporting implications (depending on what type of company you have). Check with your accountant or lawyer about this.

An easier approach is to sign an agreement where the provider gets profit share from your company and also a certain percentage of any future sale of your company. This makes it much easier, with no reporting requirements. Although they may or may not agree to it!

Also in general be careful about this sort of arrangement as the company is probably quite desperate to do this, without any cash payment and there is a high probability that they won't deliver what you are hoping for.

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Also in general be careful about this sort of arrangement as the company is probably quite desperate to do this, without any cash payment and there is a high probability that they won't deliver what you are hoping for.

This may not be true. We (Artha42), had discussions regarding profit sharing and a percentage of the future sale with one of our clients in India. We did this not because we were desperate but we trusted that with our expertise and their focus, it could turn out to be mutually beneficial. I am not sure about the implications of it in the states but in India, it is just a simple agreement.

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Hi there, I run a software company in India and we have a US presence as well (Pumex Infotech) . Most of our customers are from USA and we work with several product development companies from USA.

Before you tie-up with any one, learn about their expertise and execution history. There are companies who commit on deliverables and fail on the commitments. This makes you loose on time and energy. Make sure that this agreement is not made just because of despiration.

I am not a lawyer, but in my understanding there are some regulations for FDI (foreign direct investment) in India, even if you are not paying up front. Indian company needs to register as a Private Limited company and offer several shares to the US company and for that you need to get RBI approval (Reserve Bank of India).

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