Creating and running a remote Estonian software business with Xolo, Holvi, Transferwise, Paddle and e-residency.

I’ve been running my software company Sol Inventum (the first product was: MailMerge365 the simplest mail merge plugin for Office365) for almost a year now. So it’s time to share my experiences and hopefully help others decide what’s right for them.

Updated 27.05.2020: New Xolo pricing and information about integrated business account.
Updated 23.02.2020: Xolo Updates

Overview of steps to establishing my business

1. Apply for Estonian e-residency
2. Collect the chip card (and free card reader) from an Estonian embassy
3. Sign-up for company provider Xolo (at the time they were called LeapIN)
4. Sign-up for bank account with Holvi and get debit business credit card
5. Sign-up for Paddle payment gateway to sell products with credit cards
6. Sign-up for Transferwise Borderless to get a business credit card that more services will accept (than the Holvi card)

I did the first two steps in Vienna years ago and all the rest from a co-working space in Tenerife. There are different pickup locations around the world where you can get your e-residency documents, which makes the whole process truly remote. I have yet to go to Estonia, but when I do it will be for pleasure and not just for business admin purposes :)

E-Residency

The Estonian e-residency program gives you a digital identity backed by the Estonian government. This let’s you use government services (which are completely digital in Estonia). The identity can be used to sign documents and probably used to sign in to other services that support a digital identity too (but to be honest I’ve only ever had to use it for Estonian processes).

It’s important to note that the naming may convey that you get Estonian citizenship, but that is NOT the case. You simply get access to the digital government. With that you can for example start a company.

But there is such a thing as a Estonian Digital Nomad Visa in the works apparently, which is not the same as the e-residency, but probably a lot easier if you already have e-residency. Not sure about the status, the last information I could find was an older article stating it was coming early 2019. As I’m writing it’s early 2020, so …

And yes, you don’t have to be European to get e-residency. Please check beforehand though if all the other aspects of creating an Estonian business are available to non-Europeans.

Why an Estonian company?

This topic is discussed a lot around the web so I won’t go into too much detail here. There are other country options for creating companies too. My reasons for Estonia were (and are):

• It’s a European country, therefore the company has a European address and follows European laws
• Estonia has a track record of digital government and streamlined the processes
• It’s a limited liability company with a 1 EUR capital requirement
• Company profits are taxed when they are taken out, not at the time they are created.
  • This basically means if you re-invest your profits, which I assume most will do in the early days of product businesses you have the full amount at your disposal. Compare that to other countries where every year your profits are calculated and you pay e.g. 25% corporate tax rate on Dec 31st even if you’re going  spend that money on business expenses on Jan 1st. In Estonia that corporate tax rate is only deducted when you pay out dividends for example.

The big other option that’s always mentioned is creating a US company (Delaware Corp) with a provider like Stripe Atlas. I don’t have any experiences with that option and have only heard anecdotes (e.g. setting up is more or less automated and friction less, but try changing your business address and you drown in manual legal work) but please do your own research. An LLC is the default for most investors and even good investors like TinySeed require you to have a US company (although I really hope we can get a European option, any European option, in future for TinySeed or any other bootstrapper fund).

Starting an Estonian company with a service provider

You can create an Estonian company by yourself. Most documentation is available in English, but it won’t hurt to have Google translate available. And you’ll need a business address in Estonia.

For most cases you’ll choose a service provider that handles the company formation, provides a business address (an agent) with mail forwarding and possibly even the accounting.

The two I was left with after my some research and referrals from others were Nordic Consult and Xolo (at the time LeapIN). I chatted with both to clarify some questions and ultimately it just came down to Xolo making a better impression in their web presence. Both had similar prices, services and support.

Xolo has two main limitations:

1. They only accept certain types of businesses. Basically they’ve optimized their processes for consulting, digital services and products (excl. crypto). Update 2021: And now print-on-demand businesses on higher plans.
2. You can only be the sole personal shareholder. No holding company or multiple shareholders.

Nordic Consult and others can provide those, albeit at a sometimes higher cost.

Xolo’s offering is currently split into to big categories: Xolo Go and Xolo Leap.

Xolo Go

This is the “get started quickly” option where you don’t even create your own company but rather sell your products and services through Xolo themselves who then pay you (minus a 5% fee). You can have business expenses and such, but it is ultimately not your own company. Setup is fast and cheap.

Xolo Leap

Update 2021: Over the two years this product has changed quite a bit from being their only product to trying to incorporate their own banking which failed as a result of the Wirecard scandal. See their pricing page for the most up-to-date details but essentially you start at ~95 EUR (incl. VAT) and get:

• company creation – you basically just sign the documents they send
• business address and agent (incl. mail forwarding)
• accounting: once a month you get a reminder and upload invoices and they now have an email address you can send invoices too as well
• taxes and company reports
• pay your own salary and pay yourself dividends

The middle plan Xolo Leap PRO is ~143 EUR (incl. VAT) and adds:

• Stripe and Paypal
• Up to 3 Estonian employees

The highest plan Xolo Growth is only useful if you have more than 3 Estonian employees or want a personal accountant.

In May 2020 this current pricing was introduced and old accounts incl. mine were going to be grandfathered in. This decision was reversed in Feb 2021 and so my monthly cost went up. This was in part because I was testing Stripe and Paypal but as their support mentioned it was also because I was still running on the Holvi account which cannot be integrated well into their platform and creates manual effort. It’s understandable although I personally think loyalty should be rewarded and is also the way I operate my business. I can only assume the Wirecard scandal may have caused a significant hit to Xolo’s bottom line, after all they had invested a lot in integrating their own banking solution.

For those in my situation with a Holvi account, you can switch to Transferwise Borderless which is a better product anyway in my opinion and return to the lower Xolo Leap plan (if you also just use Paddle and not Stripe or Paypal).  

• If you want to use Transferwise, Stripe and Paypal you have to move to a higher plan (starting at ~155 EUR incl. taxes). If you want an account from LHV (an Estonian bank) you should also go through Xolo as they have a 50% discount agreement.

Update 2021: the price reduction for the first three months on each plan used to be 50% off but I don’t see that option mentioed anywhere anymore.

Note: You can hibernate your company if you have no revenue for around 35 EUR / month (incl. taxes). All prices with taxes here, because Xolo (an Estonian company) will invoice you (also an Estonian company) with VAT which you can (only) get back if you purchase from another Estonian company which in 2 years I have not been able to.

Would I do anything different now if I started again in 2021? Probably I would look at Xolo Go in detail now, but I wouldn’t choose a different provider. Xolo reminds me about once a month to upload invoices, has had terrific and fast support even for tough questions and I’m very pleased. The decision to not grandfather old accounts into new pricing plans leaves a bad taste especially as this can now be expected for future price increases.

Getting a bank for your Estonian company

When I started my company there were three options for bank accounts that Xolo supported:

1. LVH bank – requires a face to face in Estonia
2. Transferwise Borderless – can be created remotely
3. Holvi – can be created remotely

Holvi have stopped supporting e-residency bank accounts so Xolo dropped them and now you’re left with one remote option and one non-remote option. (Update May 2020: Xolo now has an integrated bank account, see above.)

I chose Holvi at the time because it seemed to be the bigger more stable bank in the space at the time. Seems like I was wrong and I would go with Transferwise Borderless today. Not only because it is the only remote option left but also their credit card is more accepted online.

A note on Holvi credit cards: they are actually MasterCard debit cards. And I ran into two issues:

1. Service providers* (like hosting, in my case Azure, but I wouldn’t be surprised if any pay-as-you-go hosting provider like AWS doesn’t have the same problem) won’t accept debit cards if they charge you for services after usage. But there’s also no option to “charge” your hosting account (basically pre-paying) so with a Holvi you’re stuck with no option but to pay with your personal credit card and then let the company reimburse you.
2. Holvi issues cards only to personal addresses, so my credit card is tied to a personal address no the company address, even though it is linked to the business account. This causes all kinds of problems when the provider in question can’t support a separate credit card address verification and invoice billing address. This is less of Holvi’s fault but more a limitation of some services (yes, I’m looking at you Reddit Ads).

Transferwise credit cards are also debit cards but they must somehow be treated differently by providers. I have up to this day not had a service provider decline the Transferwise credit card for the same reasons and the card is issued to the business address (even though it is delivered to my personal address).

Would I do anything different now? Go with Transferwise Borderless from the start. They can do anything Holvi can and more.

*Actually in addition to the above my Holvi card was:

• blocked for fraud suspicion with Microsoft Office365 (not for the subscription for my company itself, but when I tried recording a screen capture of how “easy” it is to setup a small company with a custom domain there – yes, the irony is not lost on me).
• rejected my a number of e-commerce stores such as most recently StackCommerce

Selling products and services with Paddle

Just by using your bank account you can already sell products and services if your clients pay via bank transfer (SEPA). But if you’re selling anything as a self-service offering or in general want to support payment by credit card you will need a payment provider.

When I founded Stripe wasn’t available in Estonia and Xolo recommended Paypal or Paddle. Stripe is now available, alongside Paypal too. But Paypal and Stripe require the Leap PRO plan at a higher cost.

I wouldn’t touch Paypal as a business with a ten foot pole thanks to their track record. (If you have to I seriously recommend leaving as money in a Paypal account for as little time as possible.)

So I started researching into Paddle. There were some red flags about bad support, but they mostly seemed to be in the past and my support experience with them has been good and fast. Paddle also only support certain types of businesses, but they mostly match what Xolo accepts.

Their platform handles:

• credit card payments
• product and subscription management (with a reasonably good API)
• and coming soon apparently: business invoicing (giving your consulting customers the opportunity to pay invoices by bank transfers and handling the follow-ups)
• for an extra fee they offer:
  • abandoned cart recovery
  • providing leads via their marketplace
  • affiliate management and payouts

But also because they are a merchant of record**:

• tax calculation, deduction and handling
• first level billing support

Would I do anything different now? No. It comes down to this: Paddle is more expensive than Stripe, but provides more value to me as a business owner which I think makes the additional percentage in transaction fees (see below, but currently 5% of your Suggested Retail Price plus $0.50) worth it.

Also: Refunds in Paddle are free. They pay back both the charged amount and their own fees. Stripe (and many other providers) only pay back the charged amount but keep their fees. Not only do you lose the revenue, you have to pay for that loss on top.

• This is very important in the early days of any business as you have growing pains and sometimes just have to refund someone because your service is not up to the level yet that you want.

**Merchant of record is a daunting term if you’ve never heard of it. It basically means Paddle is selling your software on your behalf. This is mostly transparent to your customers: they visit your website or app, you include the Paddle checkout just like a Stripe checkout and people start using your app. Just the invoice they get is issued by Paddle, not by your own company. You get a payment once a month from Paddle and issue a single invoice to them for the licenses they sold “on your behalf”. The reason this is done (and many other like Digital River or FastSpring are also built this way) is that they take care of all the complicated tax stuff for you and handle all the security issues like the recent “strong customer authentication” change. All this is possible with Stripe but in my opinion will cost more time and money to get setup correctly.

While I am very happy with Paddle there are two criticism I need to mention:

1. I challenge you to try finding the transaction fees for paddle on their website (without clicking the link obviously). They have not only removed it from their pricing page (it was front and center when I signed-up) but they have deliberately chosen wording (“discount” instead of “fees”) to make it now show up on search engines****.

I really don’t understand the thinking behind this. It’s going to be one of the first question anyone asks and while they say it’s due to volume pricing (which it isn’t when you’re starting out) the whole “hiding of information” leaves a really bad taste – even as an existing customer.

Hello Alex,

Our prices depend on the volume of transactions being processed, and therefore vary. This is why we avoid advertising one price for everyone. I’d be more than happy to cover this with you – let’s chat in DM. No sales stuff – I promise :)

Best,
Jeppe
Seller Support

— Paddle (@PaddleHQ) February 21, 2020

2. Their terms of services state:

4.2 As Merchant of Record, Paddle shall have the right to set the price or licence fee at which the Product is offered for sale to Buyers.

This is in there for legal reasons – after all they are selling at different prices based on the tax situation of the buyer. But just reading this paragraph lets you wonder if they can set a discounted price and then just pay you less. You need to go way further down to 9.1.1 to read:

9.1.1 Upon a valid sale occurring of the Product, Paddle shall add to your Vendor Account an amount equal to the SRP less: any Sales Tax due, the Paddle Discount and charges for Additional Services and all other charges referred to in these Terms of Use.

So no, if you set a SRP (suggested retail price) of 100 EUR and Paddle sells it for less then that you will still get 100 EUR minus tax and minus the Paddle fee, but I wouldn’t want to confuse my customers with Paddle setting those prices at their own discretion. Imagine my pricing page stating one price and the Paddle checkout stating another. You might ask: Why would they do that? Well Amazon does it, but mostly to empty out their Warehouses. It hasn’t happened to me with Paddle and I really don’t assume it will happen for digital services, but just having that in the ToS makes me uneasy. I may be one of the few people on earth who actually reads terms of services though … ;)

****People will generally search for “paddle transaction fees” or “paddle fees” or “paddle cost” or “paddle pricing” but probably not “paddle discount” (which implies they are giving you a rebate), but you can find it under heading 4. Paddle Discount (they removed the direct link to that section for some reason – I cannot fathom why that might be ;)

Summary

Update 2021: It’s now been two years running my business in this fashion and the business administration has been smooth and let me focus on product and growing the business.

Xolo is still a great partner. I think they suffered badly from the Wirecard scandal having just before it happened bet a large part of their product on a Wirecard banking product and the consequences can be seen in their pricing, but not in their level of quality which is still supperb.

Having invested some more time into Stripe my opinion that Paddle is the better hands-off choice has only grown. Paired with a Transferwise Borderless account for your company banking it’s a really strong combination.

I wish other European countries would make it possible to found like this. Some aspects are there (Austria has super fast company founding as a Sole proprietor, but for a limited liability company you have a 35.000 EUR capital minimum and need notary acts – although they are finally letting providing a digital version for the latter, see Digital GmbH).

After Brexit the UK Ltd. is no longer a European company, so in my opinion Estonia is still your best bet. Let’s see what the future brings …