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One topic that frequently comes up for Canadian founders raising from U.S. VCs is the location of their startup’s incorporation.

Are you a Delaware C-Corp?

What exactly is a Delaware C-Corp and why do Silicon Valley VCs care so much about where your company is incorporated?

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Let’s start with the basics:

A C Corporation (C-Corp) is the most common corporate structure in the US.

It’s a legal entity in which the owners/shareholders are taxed separate from the company.

In Canada, the equivalent is a Canadian-Controlled Private Corporation (CCPC).

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In the U.S., just like in Canada, the choice of state/province in which you incorporate has both legal and tax implications.

Delaware is the preferred state of incorporation for most businesses because the state has more than 200 years of business-friendly legal precedents.

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The high volume of cases the Delaware Court of Chancery has processed has resulted in judicial outcomes that are overwhelmingly predictable.

The court also has a history of protecting the right of founders & board members to make decisions without risking personal liability.

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Delaware does not require companies to be physically based there in order to incorporate.

You are only required to have a Registered Agent (a Delaware-based intermediary who forwards legal documents and correspondence from the Delaware Division of Corporations to you).

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When I was a founder, the companies that I raised VC capital for (or considered raising external capital for) were all Delaware C-Corps.

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Right now, you might be thinking “all of this sounds great, but my company is based in Canada — who cares?”

In this case, it helps to think about things from the perspective of a (U.S.-based) investor.

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If your company is incorporated in Delaware, VCs don’t have to worry about potential tax or legal implications caused by where your company is domiciled.

OTOH, if your company is incorporated outside of the US, there are real implications for them.

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When a US VC invests in a Canadian company, it’s likely they will have to file additional paperwork about that investment each year.

So in addition to the uncertainty they incur by investing in a Canadian company, doing so all but ensures that they have to do more work.

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Beyond paperwork, it’s helpful to empathize with the degree of uncertainty that potential investors might feel about investing internationally.

As the saying goes, you don’t know what you don’t know.

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While it’s easy to say that “great companies can be based anywhere,” a typical investor has never given much thought to the tax and legal implications of investing in other countries.

Most Silicon Valley VC has no clue how Canadian taxes or laws work.

Nor should they.

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That doesn’t mean they don’t want to invest in Canadian companies (they wouldn’t be talking to you if that was the case).

It means is that figuring out whether they can invest in an Ontario-, Quebec- or BC-domiciled company just might not be worth the effort to them.

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As a Canadian founder, there are many reasons to keep your company domiciled in Canada.

Many grant programs are only available to CCPCs.

Others, like SR&D, have material differences depending on whether or not the company is domiciled in Canada.

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Plenty of Canadian founders simply want their company to be Canadian (and that’s awesome!).

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If you’re looking to raise from Silicon Valley VCs but want to remain a Canadian-domiciled company, it's important you prepare for that conversation.

There are three things you need to know before talking to VCs:

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1. Know Your Numbers

How much would you lose in grants, SR&D, etc. if you change to a Delaware C-corp?

Investors are in the business of making money, so coming prepared with hard numbers of the cost of the change can make all the difference.

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2. Know Your Emotions

If remaining Canadian-domiciled is important to you for non-financial reasons, that’s equally as significant.

But you need to think in advance about how to convey that to investors.

Americans of all people respect patriotism, but you can't ad lib.

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3. Know Your Line

Is this a deal-breaker for you?

Understanding the answer to that simple question before you talk to VCs is incredibly important.

Are you willing to walk away from a potential investor to remain a CCPC?

Because it may be a deal-breaker for them.

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At the end of the day, you should expect the majority of U.S. VCs to ask you to reincorporate as a Delaware C-Corp.

It's easier, cheaper and and more predictable for Silicon Valley VCs.

But if it’s important to you to remain a Canadian-domiciled company, come prepared.

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chrisneumann.com/blog/why-silicon-valley-vcs-want-you-to-incorporate-in-delaware
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Good thread.