In previous blog posts I suggested that incorporating in Canada is not a substantial hindrance to receiving U.S. investment. In some situations, the U.S. investor could require the Canadian company to become a U.S. (likely Delaware) company. While this sounds simple in practice, how does this Canadian-U.S. company swap work?
While each investment is different, one approach is as follows:
1. The investor and Canadian company reach an agreement on investment terms. This agreement also lays out the steps that must be completed as part of the deal (both before the deal is closed, and after) to facilitate the swap.
2. A U.S. company is incorporated (likely Delaware). This company will receive investment from the U.S. investor.
3. The U.S. company acquires the Canadian company through a share exchange whereby shares of the U.S. company are exchanged for shares of the Canadian company. Through this exchange, the Canadian founders/other shareholders receive equivalent equity in the U.S. company as they had in the Canadian company and the Canadian company becomes owned, 100%, by the U.S. company.
4. Investment is made in the U.S. company.
There are also additional considerations, such as how the Canadian subsidiary will be used going forward and ownership of intellectual property. Ultimately, the steps above aim to show you that a Canadian incorporated startup can be later swapped for a U.S. company to satisfy an investor.