Many founders I speak with are concerned about where their startup is incorporated and how this could impact fundraising opportunities in the United States. In reality, this concern is unfounded.
Any sophisticated investor considers the product/service, team, market potential and other commercialization factors before, if at all, considering where a startup is incorporated. In some circumstances, an investor may request that the startup alter its jurisdiction of incorporation but whether or not they proceed with the investment is determined 90% by quality of the company over jurisdiction of incorporation. As relayed to me by Canadian founders, “if an investor passes because you’re a Canadian company, that’s not the real reason for passing“.
Canadian founders should focus on building a compelling product/service and not waste energy worrying about minutia of incorporation. Sell investors on your company and any issues concerning where your company is incorporated can be worked out between your legal counsel and investors.
The US DMCA (Digital Millennium Copyright Act) contains very useful provisions that provide a company with a safe harbour (in the U.S.) from copyright infringement committed by users of the company’s website or other online service. For technology companies, especially those that permit users to contribute content, this safe harbour is invaluable as, without, liability for copyright infringement committed by users could be a financial disaster – imagine the liability a video upload site could incur.
To be granted the safe harbour, your company must comply with a number of legal requirements, including:
The posting of certain information concerning a notice-and-take-down process for alleged copyright infringing content, counter-notice to challenge an allegation and compliance with this process; and
Registering your online service with the US copyright office and registering a DMCA agent, who acts as the point of contact for DMCA/copyright infringement claims.
Previously, DMCA agent registration did not expire. Due to changes in the regulations governing DMCA agent registration, all current DMCA registrations expire on December 31, 2017. Going forward, companies may register DMCA agent information electronically, each registration being valid for 3 years. A failure to re-register a DMCA agent will result in the loss of the DMCA safe harbour, even if you previously registered and no change occurred with respect to that agent.
The benefits to the DMCA safe harbour greatly outweigh the minor costs involved in registering a DMCA agent. Accordingly, we recommend registration to our Canadian clients, even if they do not have a presence in the U.S. If your company has already registered, be sure to contact your legal counsel to timely begin re-registering your DMCA agent.
Working with early-stage startups and game studios, we are often involved in key company decisions, such as a first hire. Lately, with many of our clients growing their teams, we’ve been fielding questions concerning the scope of employment agreements. Below are a few recommendations:
Consider a less strict intellectual property ownership clause. From the outset, I must stress that the company needs to own employee work product. However, there are different ways to define what constitutes “work product”. The most contentious IP clauses grant the company ownership of everything created during employment, at home or at work. These broad clauses are often at odds with the creative nature of the industry, where employees work on personal projects outside the office, which do not relate to the employer’s business. For example, making indie games outside of working at a AAA studio. Further, such broad clauses can drive away prospective employees. While each company’s needs are different, a carefully crafted IP clause can ensure company ownership of work product while encouraging employee creativity in a manner that does not jeopardize such ownership.
Non-compete clauses are useless (in many jurisdictions). There seems to be an infatuation with non-compete clauses among early-stage founders, perhaps because there is a presumption that the clause will protect the company’s interests. It won’t. In many states (California, for example) non-compete clauses are unenforceable against employees (excluding senior management). If you’re asking a junior dev. to sign a non-compete, it’s probably unenforceable. If non-competes are enforceable in your jurisdiction, the clause must be carefully crafted – as a broad clause will be found unenforceable. In my opinion, I always exclude non-compete clauses unless there is truly a reason for the clause and I believe there is a reasonable chance it will be enforceable. In most cases, a standard confidentiality clause will provide the company sufficient protection.
Law overrides employment terms. Employees may be entitled to overtime, paid vacation etc., the terms of which are set by the laws of your jurisdiction. As a result you, can’t force an employee to waive the rights to which they are legally entitled. For example, an employee agreeing to be paid a flat wage when the employee is also entitled to overtime is not legal. When hiring an employee, be sure that the employment terms are consistent with applicable laws. When you start introducing startup employment trends (unlimited paid vacation, for example), further caution is needed to ensure that the trend reconciles with the legal requirements of your jurisdiction. Tip: speak with your legal counsel.
In addition to the above considerations, we recommend that you have your lawyer draft an employment agreement template that reflects your legal needs. In doing so, you can address the above concerns and create an agreement that will serve your company needs as the team begins to grow.
It seems Canadians are still wrestling with whether to incorporate their startup in Delaware. I wrote about this question back in September 2014 and since then the post has racked up over 1,000 views. Back then, I concluded with this piece of advice, which I still stand by:
Don’t lock yourself into Delaware before you know where your investment comes from. Based upon the cost and complexity of operating a Delaware startup from Canada, I recommend that you incorporate in Canada at the start. Where a future U.S. investor requires you to incorporate in Delaware (or another state) your legal advisors can assist with this transition. Conversely, Canadian investors may prefer to invest in a Canadian company!
Tip: your product/service is important, not the place of incorporation.
In addition to the legal, accounting and immigration reasons I raised in support of initially incorporating in Canada, I wanted to revisit this question and point out the various incentive programs only available to Canadian companies:
1. BC EBC Tax Credit. This tax credit grants investors in eligible business corporations (EBC) a 30% refundable tax credit for their investment (up to $60,000 annually). This program is only available to BC or federally incorporated companies. BC angel investors quite like this program and it can often serve as an incentive for investment – an incentive that is lost should you incorporate in Delaware.
2. Industrial Research Assistance Program. Otherwise known as IRAP, the program provides companies with non-refundable funding under 4 different arms, including grants that can cover substantial portions of your company’s labour or R&D costs. This program is only available to provincial or federally incorporated companies. Again, if you incorporate in Delaware you lose access to IRAP funding.
The above are two examples among many programs, both federal and provincial, that require recipients to be Canadian companies. When choosing where to incorporate, consider the benefits that are available to Canadian companies that are lost if you incorporate a Delaware company. While I’m not averse to incorporating in Delaware, I am averse to incorporating in Delaware for the sake of emulating other successful U.S. startups without considering the costs/benefits of this decision.
As I concluded two years ago: incorporate in Canada first. If your jurisdiction of incorporation needs to change this can be easily accommodated in the future.