Generally, no.

I am often asked whether a new startup should incorporate in Delaware, instead of Canada.  This question stems from concerns that a Canadian corporation will limit a startup’s ability to raise U.S. investment (California angels/VCs) whereas a Delaware corporation will increase their chances of investment as Delaware is the most common incorporation state among U.S. startups and, as a result, most familiar to U.S. investors.

Back to my “No” response.  There are multiple expenses (and problems) involved in the Canadian-Delaware Startup if the founding team is based in Canada:

1.  U.S. Visas.  If you don’t have a U.S. visa, you can’t work for your own Delaware-incorporated startup in the U.S.!  You need a U.S. visa to work in the U.S. and merely incorporating a U.S. company does not eliminate this requirement.  This is not to say that obtaining a VISA from your own company is impossible but will likely be a challenging and expensive process.

2.  Tax Consequences.  A Delaware startup operated by Canadians in Canada will raise U.S. and Canadian tax issues that will likely require the experience of one, if not more, cross-border accountants in addition to Canadian and U.S. tax filings.  As with the visa issue, these tax consequences will increase your early-stage startup’s professional fees at a point when this money could be better spent on development.

3. Tax Credits. A Delaware startup may not be able to use all (or any part) of Canadian tax credits, including but not limited to SR&ED and IRAP, which would otherwise have been available if your startup was incorporated in Canada. In addition, when you sell your Delaware startup, certain Canadian personal tax exemptions (see: capital gains exemption) will not be available, which may create a sizeable personal tax hit on exit.

4.  U.S. and Canadian Legal Teams.  If your Delaware startup is operating out of Canada, U.S. and Canadian laws will apply to it (for example securities, employment and intellectual property laws) and require Canadian and U.S. legal advisors (shameless plug:  Voyer Law Corporation acts as a single advisor on both Canadian and U.S. law).  Again, as with the tax point above, these legal fees will cut into your development funds.

However, if your founding team contains U.S. citizens, a Delaware startup may be right for you.

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.

A Terms of Service agreement is nothing without proper placement on your website.  Whether you or your lawyer drafts the ToS is irrelevant if your ToS is placed incorrectly as placement often determines whether the ToS is enforceable.

Often clients assume that placement at the bottom of the website is enough.  However, as a recent U.S. case illustrates, mere placement at the bottom of the website may not be enough!

In this recent case, a website allowed users to buy a service but did not present the ToS to users until AFTER the service was purchased. While the ToS was placed at the bottom of the website as a link labeled “Legal,” the court found this process unfair and unenforceable.

The solution?  Require users to explicitly acknowledge and agree to your ToS BEFORE the point of sale and before the user clicks “I Agree” to purchase. In some cases, it may be possible to accomplish this earlier in the transaction if you require users to agree to the ToS when they create a user account BEFORE purchasing.

If you operate a website, game or app you should consider whether the U.S. Children’s Online Privacy Protection Act (COPPA) applies to your data collection practices.  Even if you complied with COPPA in the past, it is surprisingly easy to violate in the future when the development team adds new features without running them by legal counsel.

COPPA applies to your website, game or app in any of these four scenarios:

1.  if directed to children under 13 and you collect personal information from them;

2.  if directed to children under 13 and you let others collect personal information from them;

3.  if you have a general audience, but actually know that you collect personal information from children under 13; or

4.  if you operate a plug-in or other third party service, and have actual knowledge that you collect personal information from websites, games or apps directed to children under 13.

What is personal information?  Personal information is information that can identify a user, such as their full name, email address (or other persistent online identifier), image, voice or geolocation data.

How do you know if your website, game or app is directed at children under 13?  A number of factors are considered, such as subject matter, content, whether animated characters are used, child-oriented activities or incentives, ads directed at children or any other evidence regarding the age of the actual or intended user base.

Can I use an age screen?  Maybe (my apologies for the typical lawyer answer).  Age screens are permitted if the service does not target children as its primary audience.  The determination of primary audience is (once again) a factor-oriented analysis.

Penalty?  Penalties depend on a number of factors, but each violation can cost up to $16,000.

COPPA will not always apply to your website, app or game but you should consult legal counsel to determine whether COPPA applies.  Additionally, before adding any new features that collect personal information, consult with legal counsel once again to ensure that these new features don’t implicate COPPA.

Startups and video game companies often ask me to draft a privacy policy AFTER development is complete. Unfortunately, developers often fail to track their software’s information collection features and 3rd party plugins used for data collection during development.  As a result, privacy policy drafting may require development backtracking to determine these collection practices.

I recommend that developers consider privacy as part of the development process. This simplifies the process of drafting a Privacy Policy, documents all information collection features in your software to assist with future development and may lower legal fees!

During development, consider the following:

1. Collect the minimum.  Only collect the minimum amount of information your company needs as this simplifies the privacy policy and is appreciated by users.

2. What are you collecting?  Create a list of all information that your software collects and make sure this list is shared between development teams and is kept up to date.  If possible, separate this information into “Personal”, such as first and last names, geolocation data or email addresses, and “Anonymous”, such as number of clicks or how long a user stayed on a page.

3. What are you using this information for?  Opposite each piece of information you collect, note what you are using this information for.  For example, in a restaurant app, beside geolocation data:  “determines user location to list nearby businesses that are similar to type requested by user”.  If you can’t find a use for information, consider not collecting that information.

4. Are you disclosing this information outside the company?  Opposite each piece of information you collect, note if you disclose that information to 3rd parties outside of your company and how those companies are using this information.

5. 3rd party plugins?  Keep track of 3rd party plugins/APIs incorporated into your software and, if possible, determine the collection practices of these 3rd party plugins/APIs as this information is also incorporated into the privacy policy.

Considering privacy as part of the development process will impose an organizational structure on your information collection practices to assist with future development and greatly assist your lawyer when preparing your privacy policy.