A minute update to deal terms 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.
On Monday, The Logic first reported 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—leaving 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 “flip” their parent company and incorporate in one of those countries—most likely the US—to get a spot.
“This is sending the absolute wrong message—that’s not substantiated with fact—to leave Canada.”
John Ruffolo
The Canadian tech industry, for whom brain drain to the US 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.
Garry Tan, the Winnipeg-born president and CEO of Y Combinator, defended YC’s decision in a series of posts on X on Tuesday, claiming that the accelerator continues to fund Canadian and Canadian startups, but that redomiciling in the US increases access to capital.
Tan wrote that in YC’s 20-year history, Canadian startups that reincorporated in the US have earned twice the average valuation of those that remained in Canada. “The ones at Unicorn, or near it, all reincorporated in Delaware,” he added.
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’s assessment about the success rates of Canadian-headquartered startups.
“This is sending the absolute wrong message—that’s not substantiated with fact—to leave Canada,” Ruffolo said. He added that Y Combinator is a great program and he has encouraged Canadian founders to pursue it.
“We’re not saying Canadians should leave Canada,” Tan wrote in another X post, praising Canada’s tech talent. “Where you are incorporated increases your access to capital. That’s it.”
Path of least resistance
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.
In 2010, Canada eliminated this problem by changing its laws (something Ruffolo lobbied for). At the time, TechCrunch hailed the move as Canada becoming “somewhat less anti-startup.”
Now, Ruffolo argued, there is no technical reason why investors should encourage startups to incorporate in the US—especially 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 “free non-dilutive capital,” Ruffolo said.
However, other prominent figures in the tech industry argued 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 on company exits could play a role. Former Panache Ventures partner Chris Neumann reshared a post explaining that US VCs prefer to avoid additional paperwork from Canadian investments, and have a lack of knowledge about tax regimes outside the US.
Early-stage guidance
At Y Combinator, founders are given resources and support to walk through the early stages of company creation—including where to base their companies. Locus 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 “guided” to incorporate as Delaware C-corps.
“Most US venture firms will want to invest in US companies and in legal frameworks they’re more familiar with,” Dermott said.
But that was only part of Dermott’s decision to incorporate in the US—another force was the vastly different VC environments in the US and Canada, with Dermott describing the latter as being more risk-averse.
“I really can’t emphasize enough how completely polarizing and different their venture environments are,” Dermott said.
Radical Ventures, a global AI-focused VC firm, regularly invests on both sides of the border and has backed Canadian startups Cohere and Waabi.
“For 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),” Radical partner Sanjana Basu wrote in an email to BetaKit. “As a global VC firm our interests are always going to be aligned with what’s best for the company.”
The draw of the Valley
Dozens of Canadian companies, including Montreal’s SRTX and Halifax’s CoLab, have been part of Y Combinator’s numerous winter and summer cohorts since the first one in 2008. The share of Canadian startups in a given cohort grew after the pandemic, aided by remote work. Tan claimed in an X post last year that “The 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.”
According to data compiled by Toronto firm Leaders Fund, only 32.4 percent of Canadian-led “high-potential” 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.
Shopify president Harley Finkelstein publicly supported Tan’s point, posting that “for startups aiming to raise venture capital, incorporating in certain jurisdictions (like Delaware) is far more advantageous, regardless of where the founders live or started.” Shopify—Canada’s most valuable tech company—is headquartered in Ottawa, but in March 2025, it began co-listing its New York City office in its filings to the US Securities and Exchange Commission (SEC).
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Finkelstein added he feels that Canadian companies incorporating in Delaware has “been the reality for years.” “YC’s formalizing what’s inevitable, not causing it,” he wrote.
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.
“Most 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,” he said.
“In the climate of the US, there’s a serious push for homeland investment.”
Cole Dermott
The change to Y Combinator’s 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 “economic coercion” that Prime Minister Mark Carney has accused the country of levying as a weapon.
In that context, Dermott wasn’t surprised about Y Combinator’s decision to nix Canada from its investable list. “In the climate of the US, there’s a serious push for homeland investment,” he said.
Dermott said that while the net impact of the rule change on individual founders may not be huge, the “net impacts on our startup environment could be larger.”
“Navigating that is the challenge that I think our government will need to figure out in the coming years,” he said.
Disclosure: BetaKit majority owner Good Future is the family office of two former Shopify leaders, Arati Sharma and Satish Kanwar.
Feature image courtesy Andrew Whitmore via Unsplash.