You Don't Need a US Company to Raise from the US - Voyer Law Corporation | Startup Lawyers

Startup and video game law, from a Canadian and U.S. perspective

You Don’t Need a US Company to Raise from the US

We’ve attended a number of presentations lately where Canadian founders are told that they MUST be a US company to raise money from US investors. This advice is patently false; Canadian startups raise from US investors all the time and investors generally don’t care that a prospective portfolio company is Canadian.

1. Where does this Falsehood Originate?

10 years ago, US investors were less receptive to investing in Canadian companies. Many funds had a domestic focus due to a wealth of US investment opportunities but as the venture environment became more competitive, and funds ever larger, investors began to look abroad. The historic US focus of funds was often reinforced by restrictions in their LP (limited partnership) agreements that prohibited investments outside the US, with similar restrictions exhibited by incubators such as Tech Stars and Y-Combinator.

2. The Truth: US Investors don’t care that you’re a Canadian Company

Today, US investors in our clients rarely care that they are Canadian companies while most incubators have dropped the requirement that portfolio companies be US incorporated.

Of the 1,400+ companies we represent, we have only encountered 1 US investment that required the company to reincorporate in the US, in all other cases US investors took no issue with a Canadian company or could be made comfortable quickly (often any friction is due to US legal counsel’s lack of familiarity with Canada).

3. US incorporation and Canadian tax Results

Should you still wish to incorporate in Delaware, it’s important to understand that a cross-border, Delaware-Canada, structure may lead to negative tax results for both the company and its founders unless a proper legal and tax plan is created (and followed).

Potential negative tax results include: (a) personally missing out on the capital gains exemption and the roughly ~$1.25 million of tax free gains it offers; (b) the company missing out on certain R&D tax credits (see: Revisiting – Should I Incorporate my Canadian Startup in Delaware); and (c) the company being exposed to costly cross-border legal and tax issues due to bring a US company but operating in Canada.

4. Investors don’t lead with “where are you incorporated?

Investors don’t lead with “where are you incorporated?”; incorporation jurisdiction is an afterthought. If an investor wants to invest and demands a US company, your lawyers can quickly restructure the Canadian company into a Delaware company. An investor that passes, rather than allowing you to restructure, was never going to invest in the first place.

For more information, please see our posts: Should I Incorporate my Canadian Startup in Delaware and Revisiting – Should I Incorporate my Canadian Startup in Delaware.