Industry divided over accelerator\u2019s decision to remove Canada from list of investable sites.<\/p>\n
<\/p>\n
A minute update to deal terms<\/a> for famed accelerator Y Combinator has triggered a fresh wave of debate over whether the path to success for Canadian startups needs to involve incorporation in the US.<\/p>\n On Monday, The Logic first reported<\/a> that the San Francisco-based Y Combinator had quietly revised its standard deal terms webpage to remove Canada as one of what was once four permitted sites of investment\u2014leaving only the US, the Cayman Islands, and Singapore. This means Canadian startups applying to the accelerator, which provides $500,000 USD and fundraising support, would have to \u201cflip\u201d their parent company and incorporate in one of those countries\u2014most likely the US\u2014to get a spot.\u00a0<\/p>\n \u201cThis is sending the absolute wrong message\u2014that\u2019s not substantiated with fact\u2014to leave Canada.\u201d<\/p>\n John Ruffolo<\/p><\/blockquote>\n The Canadian tech industry, for whom brain drain to the US<\/a> has been a sore subject, immediately took to social media to debate the change. Some balked at the perceived affront, while others argued that Canadian startups had already been re-domiciling in the US for years, particularly as a way to attract or appease US venture capital investors. BetaKit has reached out to YC for comment, and has yet to receive a response.<\/p>\n Garry Tan, the Winnipeg-born president and CEO of Y Combinator, defended YC\u2019s decision in a series of posts on X on Tuesday<\/a>, claiming that the accelerator continues to fund Canadian startups, but that redomiciling in the US increases access to capital.<\/p>\n Tan wrote that in YC\u2019s 20-year history<\/a>, Canadian startups that reincorporated in the US have earned twice the average valuation of those that remained in Canada. \u201cThe ones at Unicorn, or near it, all reincorporated in Delaware,\u201d he added.<\/p>\n John Ruffolo, the Maverix Private Equity co-founder, Council of Canadian Innovators vice-chair, and prominent tech investor, told BetaKit in an interview on Tuesday that he strongly disagreed with Tan\u2019s assessment about the success rates of Canadian-headquartered startups.<\/p>\n \u201cThis is sending the absolute wrong message\u2014that\u2019s not substantiated with fact\u2014to leave Canada,\u201d Ruffolo said. He added that Y Combinator is a great program and he has encouraged Canadian founders to pursue it.\u00a0<\/p>\n \u201cWe\u2019re not saying Canadians should leave Canada,\u201d Tan wrote in another X post<\/a>, praising Canada\u2019s tech talent. \u201cWhere you are incorporated increases your access to capital. That\u2019s it.\u201d<\/p>\n Path of least resistance<\/p>\n Ruffolo explained that the roots of the Delaware-incorporation suggestion go back to an old provision in the Canadian Income Tax Act, which once required US investors in a Canadian company to request a special clearance to avoid a Canadian withholding tax. Many US investors advised Canadian companies to incorporate under a parent company in the state of Delaware, which has historically been a tax haven for many US corporations, to avoid this extra tax.\u00a0<\/p>\n In 2010, Canada eliminated this problem by changing its laws (something Ruffolo lobbied for). At the time, TechCrunch hailed the move as Canada becoming \u201csomewhat less anti-startup<\/a>.\u201d\u00a0<\/p>\n RELATED: <\/strong>She tried to bring Silicon Valley\u2019s tech energy to Vancouver. Why did she leave to build a US startup instead?<\/strong><\/a><\/p>\n Now, Ruffolo argued, there is no technical reason why investors should encourage startups to incorporate in the US\u2014especially if a company wants to benefit from Canadian government kickbacks such as the Scientific Research and Experimental Development (SR&ED) tax incentive. Losing this would amount to missing out on \u201cfree non-dilutive capital,\u201d Ruffolo said.\u00a0<\/p>\n Other prominent figures in the tech industry suggested that there are reasons why US investors might want to encourage Canadian companies to incorporate in the US beyond withholding tax. Melody Kuo, a co-founder of tech-focused non-profit organization Build Canada, noted on X that differences in tax regimes<\/a> on company exits could play a role. <\/p>\n Early-stage guidance<\/p>\n At Y Combinator, founders are given resources and support to walk through the early stages of company creation\u2014including where to base their companies. Locus<\/a> founder Cole Dermott, who grew up in Collingwood, Ont. and graduated from the fall 2025 Y Combinator cohort, told BetaKit in an interview that founders are \u201cguided\u201d to incorporate as Delaware C-corps.\u00a0<\/p>\n \u201cMost US venture firms will want to invest in US companies and in legal frameworks they\u2019re more familiar with,\u201d Dermott said.\u00a0<\/p>\n But that was only part of Dermott\u2019s decision to incorporate in the US\u2014another force was the vastly different VC environments in the US and Canada, with Dermott describing the latter as being more risk-averse.<\/p>\n \u201cI really can\u2019t emphasize enough how completely polarizing and different their venture environments are,\u201d Dermott said.\u00a0<\/p>\n Toronto-based Radical Ventures, a global AI-focused VC firm, regularly invests on both sides of the border and has backed Canadian startups Cohere and Waabi.\u00a0<\/p>\n \u201cFor Canadian teams, there are very meaningful benefits to being incorporated in Canada (talent pools, SRED and other tax incentives, access to US and international markets),\u201d Radical partner Sanjana Basu wrote in an email to BetaKit. \u201cAs a global VC firm our interests are always going to be aligned with what\u2019s best for the company.\u201d<\/p>\n Former Panache Ventures partner Chris Neumann posted a reminder on LinkedIn that \u201cmost US VCs do not, in fact, require your company to be incorporated in Delaware,\u201d resharing a 2023 blog post<\/a> which explained that while US VCs often prefer to avoid additional paperwork from Canadian investments, Canadian founders have options other than moving south.<\/p>\n \u201cIn my experience, virtually every US VC is willing to invest in a Canadian-domiciled company,\u201d Neumann told BetaKit. He pointed to a post<\/a> from well-known American VC Villi Iltchev, with whom he has coinvestments in Canadian companies, as evidence.<\/p>\n The draw of the Valley<\/p>\n Dozens of Canadian companies, including Montr\u00e9al\u2019s SRTX<\/a> and Halifax\u2019s CoLab<\/a>, have been part of Y Combinator\u2019s numerous<\/a> winter and summer cohorts since the first one in 2008. The share of Canadian startups in a given cohort grew after the pandemic<\/a>, aided by remote work. The Y Combinator startup directory<\/a> shows 144 graduate companies headquartered in Canada\u2014though the website notes it doesn\u2019t include all companies originally founded in Canada or built by Canadian founders.<\/p>\n Tan claimed in an X post<\/a> last year that \u201cThe Canadians stay in the USA and raise more money. The ones that stay in SF after demo day become unicorns at 2.5X the rate.\u201d<\/p>\n According to data compiled by Toronto firm Leaders Fund<\/a>, only 32.4 percent of Canadian-led \u201chigh-potential\u201d startups (companies that have raised more than $1 million USD) created in 2024 were headquartered in Canada, while almost half were located in the US.<\/p>\n Responding to a thread citing<\/a> the Leaders Fund data, Shopify president Harley Finkelstein publicly supported<\/a> Tan\u2019s point, posting that \u201cfor startups aiming to raise venture capital, incorporating in certain jurisdictions (like Delaware) is far more advantageous, regardless of where the founders live or started.\u201d Shopify\u2014Canada\u2019s most valuable tech company\u2014is headquartered in Ottawa, but in March 2025, it began co-listing<\/a> its New York City office in its filings to the US Securities and Exchange Commission (SEC).\u00a0<\/p>\n RELATED: <\/strong>Y Combinator is stealing Canadian startups<\/strong><\/a><\/p>\n Finkelstein added he feels that Canadian companies incorporating in Delaware has \u201cbeen the reality for years.\u201d \u201cYC\u2019s formalizing what\u2019s inevitable, not causing it,\u201d he wrote.\u00a0<\/p>\n Alistair Vigier, the founder of legal AI startup Caseway, told BetaKit in an email that incorporating in the US is seen as the best option to effectively scale a company.\u00a0<\/p>\n \u201cMost founders I know are not itching to leave Canada. They are forced to look elsewhere because the tools and networks they need are south of the border,\u201d he said.\u00a0<\/p>\n \u201cIn the climate of the US, there\u2019s a serious push for homeland investment.\u201d<\/p>\n Cole Dermott<\/p><\/blockquote>\n The change to Y Combinator\u2019s policies to remove Canada from the short list of nations it invests in comes during a chilly economic climate between Canada and the US. Last week, US President Donald Trump threatened Canada with 100-percent tariffs on its exports to the country, the latest \u201ceconomic coercion<\/a>\u201d that Prime Minister Mark Carney has accused the country of levying as a weapon.\u00a0<\/p>\n In that context, Dermott wasn\u2019t surprised about Y Combinator\u2019s decision to nix Canada from its investable list. \u201cIn the climate of the US, there\u2019s a serious push for homeland investment,\u201d he said.<\/p>\n Dermott said that while the net impact of the rule change on individual founders may not be huge, the \u201cnet impacts on our startup environment could be larger.\u201d\u00a0<\/p>\n \u201cNavigating that is the challenge that I think our government will need to figure out in the coming years,\u201d he said.\u00a0<\/p>\n Disclosure: BetaKit majority owner Good Future is the family office of two former Shopify leaders, Arati Sharma and Satish Kanwar.<\/p>\n UPDATE (01\/28\/2026): This story has been updated to more clearly reflect remarks made in a LinkedIn post by Chris Neumann.<\/p>\n\n
\n