Startup legal playbook

Scaling-cross border: key considerations


  • Torys’ Emerging Companies and VC Group

Read this if: you are a founder looking to access new opportunities cross-border

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Go deeper: Going cross-border

Going cross-border can bring access to new markets, talent and revenue. However, it can be difficult to pinpoint the right time, and approach, to expand internationally. Delay too long, and you risk losing track of your momentum, but make the move too soon, and you risk overloading resources.

For Canadian startups, the U.S. represents a natural launching pad to the global market. There are several expansion options to select from: go all in by setting up a fully functioning regional office, acquire an existing U.S. company, enter a joint venture, license out your product, or establish a subsidiary.

We share key considerations for startups weighing a cross-border move.

Structuring the business

How you structure your startup will determine your tax rates, personal liability and a number of other variables. Many Canadian startups will choose to transition their corporation to the U.S., such as to the state of Delaware, due to its “startup friendly” protections and taxes. In order to transition a corporation from Canada to the U.S., the company can (i) effect a “flip” by executing a share-for-share exchange between the newly formed U.S. corporation and the Canadian company; or (ii) “continue” the Canadian company from Canada to the U.S. Both options have their complexities, require significant time commitment from management and must be considered carefully, including seeking detailed tax advice. Given the added complexities of a mature business, companies should consider transitioning to the U.S. (or other foreign jurisdictions) earlier in their lifecycle rather than later on.

Tax on shares and options

If you move your parent company to the U.S., both the company and its shareholders should seek detailed tax advice. While a transition, if executed correctly, can be structured to be tax neutral for the company and its shareholders, there are many considerations and decisions to be made. In addition, option holders in Canada and the U.S. are taxed differently (ISOs, NSOs and the need for 409a valuations in the U.S.; CCPC analysis and minimum hold periods in Canada), so having an understanding of the differences between the applicable Canadian and U.S. tax systems with respect to options is also necessary.

Competitive landscape search

It is important to do a trademark search to determine if a confusingly similar brand name, logo or slogan is already registered or being used by another company in your target market. If not, you may want to file a trademark application in that country. Likewise, if you will be selling product into a new country, you should consider freedom to sell the product there (do others own patent or design rights in that country that could prevent you from expanding)? If you own patentable technology, it is also important to consider whether it makes sense to seek patent protection in the expansion country. This can be done by either by filing applications in the new jurisdiction via applicable patent treaties if you already own pending patent applications, or if not, filing an originating patent application in the jurisdiction. Many countries have absolute novelty requirements, which means a patent application must be on file before any public disclosure of the invention—grace periods for public disclosure by the inventor are not available in all countries—it is important to assess the law on public disclosure/patent application status by region, before expansion.

Specialized regulation

When you become a cross-border company, you will need to ensure that you operate within the regulatory landscape of each market—ensuring that you stick to the rules set out by each jurisdiction. While Canada and the U.S. have similar laws, there are a number of different regulations when it comes to customer privacy, employee relations and other key areas—and your startup must follow the laws of the jurisdictions where it operates (including where its customers reside), regardless of the location of the parent company or the strategy you adopt to enter the U.S. market.

Labour law and payroll compliance

Cross-border employment law differences between Canada and the U.S. include, among others, differences in termination and severance, overtime eligibility and discrimination in employment. Read more about some of the employment law differences between the U.S. and Canada.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

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