Venture Capital Comparative Guide

1 Legal framework

1.1 Which general legislative provisions have relevance to venture capital investment in your jurisdiction?

In Canada, venture capital investments are governed by a combination of federal and provincial legislative provisions. The Canada Business Corporations Act (CBCA) and its provincial counterparts (eg, the Ontario Business Corporations Act) set out the foundational rules for:

• corporate governance;
• shareholders' rights; and
• directors' duties.

Securities legislation, administered by provincial regulators such as the Ontario Securities Commission along with the Canadian Securities Administrators, is also relevant. Canadian securities laws outline the rules on various prospectus exemptions, including the private issuer and accredited investor exemptions, which are often relied on by startups and ventures investors alike.

In addition, the Income Tax Act (Canada) influences venture capital structuring, particularly in the context of:

• equity-based compensation (eg, stock options);
• corporate reorganisations; and
• the treatment of capital gains.

Programmes such as Scientific Research and Experimental Development and the Lifetime Capital Gains Exemption further impact investment decisions by offering tax advantages for innovation and small business investments.

1.2 What specific factors in your jurisdiction have particular relevance for, or appeal to, venture capital investors?

Canada has a stable financial and legal system, offering investor-friendly protections and clear corporate governance frameworks under the CBCA and provincial equivalents. The country is also home to innovation hubs such as Toronto, Vancouver and Montreal, which provide access to:

• a pool of entrepreneurial talent;
• research institutions; and
• a growing number of tech startups.

Additionally, Canada's proximity and access to the US market offer a strategic advantage for scaling companies.

2 Parties

2.1 What types of investors typically provide venture capital investment in your jurisdiction?

In Canada, venture capital investments are sourced from a wide range of investors:

• Angel investors: Affluent individuals who provide early-stage capital to startups, often in exchange for equity or convertible debt. They typically engage during the seed phases.
• Angel groups: Collectives of angel investors that pool resources to invest in startups, enabling larger investment amounts and diversified risk. These groups often focus on specific sectors or regions.
• Venture capital firms: Professional investment organisations that manage pooled funds from various investors to invest in high-growth potential startups. They typically enter during early to growth stages.
• Corporate venture capital: Investment arms of corporations that invest in startups aligning with their interests.
• Government-sponsored venture funds: Entities such as the Business Development Bank of Canada that provide equity financing to startups, with the aim of fostering innovation and economic development.
• Labour-sponsored venture capital corporations: Mutual fund corporations sponsored by labour unions, offering tax credits to individual investors to encourage investment in small and medium-sized enterprises.

2.2 What types of companies do venture capital investors typically seek to invest in in your jurisdiction? Is the investment done directly or through foreign holding structures?

In Canada, venture capital investors typically target early to growth-stage companies with high growth potential, scalable business models and innovation in sectors such as:

• technology;
• life sciences;
• cleantech;
• fintech; and
• AI.

Investment is most commonly made directly into Canadian-incorporated companies. However, in cases where a company is expected to expand into US or international markets, investors – particularly from the United States – may require the use of a foreign holding structure, such as a 'Delaware flip', where the Canadian entity becomes a subsidiary of a US-based parent company. This can simplify cross-border tax planning, access to US capital markets and future exit strategies, although it requires careful legal and tax structuring.

2.3 How are these companies typically structured?

In Canada, companies that receive venture capital investment are typically structured as private corporations under either:

• the Canada Business Corporations Act; or
• a relevant provincial equivalent (eg, Ontario or British Columbia).

A typical structure involves:

• common shares held by founders and employees; and
• preferred shares issued to investors.

Preferred shares will often carry special rights – such as liquidation preferences, anti-dilution protections, warrant privileges and conversion rights – which are detailed in the company's articles of incorporation and/or shareholders' agreement.

Founders' shares are frequently subject to reverse vesting, ensuring continued commitment to the company; and employees may be granted stock options under an equity incentive plan. Companies are also structured to be eligible for federal and provincial tax incentives, such as Scientific Research and Experimental Development tax credits and the Lifetime Capital Gains Exemption, which can influence share structure and ownership limits.

3 Structuring considerations

3.1 How are venture capital investments typically structured in your jurisdiction (eg, equity, quasi-equity (SAFE/KISS), debt, other), and how does structuring typically differ between seed-stage, early-stage and later-stage investments?

In Canada, venture capital investments are typically structured as equity or quasi-equity, with the structure often varying depending on the company's stage of development. At the seed stage, investments are commonly made through simple agreements for future equity (SAFEs) or convertible debentures. These instruments allow investors to fund startups without immediately assigning a valuation. SAFEs are not debt and do not accrue interest or require repayment, while convertible debentures function as short-term debt that converts to equity upon a future financing round, often with a discount or valuation cap.

As companies move into the early growth stage (Series A/B), traditional preferred equity becomes the common structure. Preferred shares typically include rights such as:

• liquidation preferences;
• anti-dilution protection;
• board representation;
• voting rights; and
• registration rights.

These rights provide investors with downside protection and governance influence.

In later-stage investments, structures become more complex, often involving multiple classes of preferred shares with:

• tiered rights;
• dividend provisions; and
• negotiated exit preferences.

3.2 What are the potential advantages and disadvantages of the available investment structures?

Equity (preferred shares) provides clear ownership and governance rights, attracting institutional investors due to protections such as liquidation preferences and anti-dilution clauses. However, equity rounds can be complex and time-consuming to negotiate, potentially leading to significant founder dilution. They are also more costly to implement. Convertible notes offer quicker and less expensive execution, delaying valuation until future funding rounds. Nevertheless, they usually accrue interest, create debt obligations and risk disputes during conversion if terms are unclear. SAFEs are favoured in early stages due to their:

• simplicity;
• low cost; and
• absence of interest or maturity dates.

However, SAFEs may introduce legal uncertainty in Canada because of limited standardisation. Venture debt provides non-dilutive funding that preserves founder ownership but requires repayment with interest, potentially adding financial strain. Additionally, venture debt arrangements may contain restrictive covenants or warrants, limiting operational flexibility.

3.3 What specific issues should be borne in mind in relation to cross-border venture capital investments?

Cross-border venture capital investments into Canadian companies raise several key considerations:

• Tax implications: Foreign investors must consider:
• • withholding taxes;
  • capital gains treatment; and
  • potential double taxation.
• Legal structure: Investors may prefer a foreign holding company structure (eg, Delaware parent) to:
• • align with familiar legal systems;
  • simplify future exits; and
  • facilitate US-based financing.
• Currency and exchange risk: Differences between Canadian dollars and the investor's home currency can affect deal valuation and returns.
• Securities law compliance: Investments must comply with Canadian private placement exemptions and any foreign securities regulations. Cross-border transactions may trigger additional disclosure or registration obligations.
• IP ownership and data residency: Investors often review:
• • where intellectual property is held; and
  • whether Canadian privacy or data residency laws (eg, for the healthcare or fintech sectors) may impact operations or value.
• Exit strategy: Cross-border investments can complicate merger and acquisition or initial public offering exits due to regulatory, jurisdictional and tax complexities. Clear planning is essential to avoid friction at exit.

3.4 What specific issues should be borne in mind when multiple investors are involved (eg, pooling)?

When multiple investors are involved in a venture capital deal, several important issues must be carefully managed:

• Governance and control: Investors may seek board representation or veto rights. When multiple parties are involved, it is essential to clearly define how control is shared, especially between lead and follow-on investors.
• Investor rights and protections: Ensure consistent terms across investors for:
• • liquidation preferences;
  • anti-dilution rights;
  • information rights; and
  • pro rata participation.
• Disparities can lead to disputes or misaligned incentives.
• Pooling and voting arrangements: Investors may form voting pools or syndicates to streamline decision-making. These arrangements must be clearly documented, particularly for key decisions such as exits or follow-on rounds.
• Cap table complexity: Multiple investors can lead to a crowded cap table, complicating future fundraising or exit events.
• Exit alignment: Different investor time horizons or return expectations can create friction during exits.
• Jurisdictional issues: If investors are from different countries, legal and tax considerations must be coordinated to avoid conflicts or inefficiencies.

4 Investment process

4.1 How does the investment process typically unfold? What are the key milestones?

In Canada, the venture capital investment process unfolds through several stages:

• Deal sourcing and initial contact: Entrepreneurs seek venture capital:
• • by leveraging networks;
  • by attending investor conferences; or
  • through direct outreach.
• Conversely, venture capitalists identify potential investments via industry research and referrals.
• Preliminary evaluation: Investors conduct a high-level assessment of the business model, market opportunity and founding team to determine alignment with their investment criteria.
• Due diligence: An analysis is undertaken, examining:
• • financial statements;
  • market position;
  • product viability;
  • intellectual property; and
  • legal considerations.
• Term sheet negotiation: Upon satisfactory due diligence, investors present a term sheet outlining the proposed investment's terms and conditions, including:
• • valuation;
  • equity stake;
  • governance rights; and
  • exit strategies.
• Negotiations refine these terms to reach mutual agreement.
• Legal documentation and closing: Legal drafts definitive agreements based on the agreed term sheet. Both parties review and execute these documents, leading to the formal closing where funds are transferred and equity is issued.
• Post-investment engagement: Investors often take an active role post-investment:
• • providing strategic guidance;
  • participating in governance through board positions; and
  • assisting with subsequent funding rounds to support the company's growth.

4.2 What types of due diligence (eg, legal, financial, technical) do venture capital investors typically conduct into prospective portfolio companies? What are key red flags for venture capital investors?

Venture capital investors in Canada typically conduct comprehensive due diligence across several key areas before committing to an investment. Legal due diligence involves:

• reviewing:
• • constating and other corporate governance documents;
  • shareholders' agreements;
  • capitalisation tables;
  • previous financings;
  • IP ownership;
  • employment agreements;
  • stock option plans; and
• assessing any ongoing or historical litigation.

Financial due diligence includes analysis of:

• historical and projected financial statements;
• the revenue model;
• unit economics;
• burn rate;
• available runway; and
• examination of tax filings and potential liabilities.

Technical due diligence assesses:

• the product roadmap;
• scalability;
• the quality of the technology stack and code base;
• IP protections (eg, patents or trade secrets); and
• cybersecurity or data privacy practices.

Commercial or market due diligence evaluates:

• market size;
• the competitive landscape;
• positioning;
• customer contracts;
• retention metrics;
• go-to-market strategies; and
• the sales pipeline.

Key red flags that often concern investors include:

• unclear or disputed IP ownership;
• inconsistent or inaccurate financial information;
• issues with the capitalisation table (eg, unexpected dilution or missing documentation);
• unresolved legal disputes or regulatory non-compliance;
• weak or misaligned founding teams; and
• unrealistic financial projections or insufficient market validation.

4.3 What documentation is typically prepared during the investment process and who is responsible for preparing this?

No answer submitted for this question.

4.4 Are standard investment documents available for venture capital investments in your jurisdiction? If so, who (eg, industry association, organisation) provides them and how frequently are they used in practice?

Yes, standard investment documents are available for venture capital investments in Canada. The Canadian Venture Capital and Private Equity Association (CVCA) provides a collection of model legal documents designed to streamline the preparation and review of private capital financings. The CVCA's model legal documents are adaptations of the US-based National Venture Capital Association model documents. They include agreements such as the following:

• term sheet;
• share purchase agreement;
• voting agreement;
• investors' rights agreement; and
• right of first refusal and co-sale agreement.

These model documents are recognised and frequently used in Canadian venture capital transactions, particularly in Series A and subsequent financing rounds. However, for earlier-stage investments such as seed or angel rounds, these comprehensive documents may be unnecessarily detailed or complex.

4.5 What disclosure requirements and restrictions may apply throughout the investment process, for both the venture capital investor and the prospective portfolio company?

Securities law compliance typically requires reliance on exemptions from prospectus obligations under National Instrument 45-106, commonly using the private issuer and accredited investor exemptions. Companies that raise funds in reliance on the accredited investor exemption must file a Form 45-106F1 Report of Exempt Distribution with securities regulators within 10 days of the investment.

Prospective portfolio companies must disclose essential corporate information, including:

• capitalisation tables;
• shareholders' agreements;
• financial statements;
• projections;
• significant contracts;
• liabilities;
• litigation history;
• compliance issues; and
• IP ownership documentation.

Investors may be obliged to disclose:

• investment mandates;
• fund restrictions;
• conflicts of interest; and
• ultimate beneficial ownership details, particularly in regulated or cross-border contexts.

Confidentiality is maintained through non-disclosure agreements, protecting sensitive business, financial or IP information exchanged during the due diligence.

Post-investment, companies typically have ongoing disclosure obligations outlined in shareholders' agreements, requiring regular reporting of financial and operational performance to investors.

4.6 What advisers and other stakeholders are involved in the investment process?

The venture capital investment process in Canada involves multiple advisers and stakeholders to facilitate:

• due diligence;
• negotiation; and
• deal execution.

Legal counsel plays a crucial role, with both startups and investors engaging their own lawyers to:

• draft and review essential documentation, including:
• • term sheets;
  • share purchase agreements; and
  • shareholders' agreements; and
• ensure regulatory compliance with securities filings.

Financial and tax advisers, including accountants and specialised tax consultants, validate financial information and review tax compliance. In technology or biotech investments, technical experts and IP consultants assess:

• product viability;
• technology risks; and
• IP protection strategies.

Patent agents or IP lawyers confirm:

• IP ownership;
• filings; and
• protection measures.

For larger or later-stage investments, companies may optionally involve investment bankers or specialised financial advisers to assist with:

• valuation;
• investor outreach; and
• negotiations.

4.7 What is the process and what (corporate) approvals are required for a portfolio company to issue shares or debt instruments to investors in your jurisdiction?

In Canada, issuing shares or debt instruments involves a structured corporate approval process governed by federal or provincial corporate laws, such as the Canada Business Corporations Act or the Ontario Business Corporations Act. Initially, the company's board of directors must formally approve the financing terms – including valuation, share class and rights – and authorise the issuance of shares or debt instruments through a board resolution. If the transaction requires amendments to the company's articles, such as creating a new class of preferred shares, shareholder approval by special resolution (typically a two-thirds majority) is necessary. Additionally, existing shareholders' agreements may mandate consent from certain shareholders before new securities can be issued. The issuance must also comply with Canadian securities regulations – typically through private placement exemptions such as the accredited investor exemption, which necessitates filing a Form 45-106F1 within 10 days of closing.

5 Equity investment terms

5.1 What key investment documents and terms (eg, valuation, share class, governance rights, liability concept, transfer restrictions, exit rights) typically feature in venture capital equity investments in your jurisdiction?

Key investment documents and terms in Canadian venture capital equity investments typically include:

• term sheets;
• share purchase agreements; and
• shareholders' agreements.

Valuation is fundamental, establishing share price and investor ownership percentages. Preferred share classes are common, offering investors priority in:

• dividends;
• liquidation preferences; and
• conversion rights.

Governance rights outlined in shareholders' agreements often grant investors:

• seats on the board of directors;
• veto rights over major decisions; and
• oversight of financial and operational matters.

Liability concepts usually limit investor liability strictly to the amount invested, protecting investors from broader company liabilities. Transfer restrictions typically appear, such as rights of first refusal or co-sale rights:

• ensuring that investors have some control over share transfers; and
• maintaining the stability of company ownership.

Exit rights include provisions such as:

• drag-along rights, enabling majority shareholders to compel minority shareholders to sell during an acquisition; and
• tag-along rights, allowing minority investors to join major shareholders in sales to third parties.

5.2 What type of security is typically issued to new investors as part of venture capital equity investments in your jurisdiction and what (economic) preference rights are typically attached to these securities (by operation of law, under constitutional documents and/or contractually)? What rules and requirements apply in this regard?

In Canadian venture capital transactions, new investors are typically issued preferred shares. These preferred shares often include a liquidation preference, ensuring that investors receive their initial investment back before any proceeds are distributed to common shareholders in the event of a liquidation or sale. This preference is commonly set at 1x the original investment but can be higher, depending on negotiations. Additionally, preferred shares may carry dividend rights, granting holders priority over common shareholders in receiving dividends, which can be cumulative or non-cumulative. Another key feature is the conversion right, allowing investors to convert their preferred shares into common shares, typically on a one-to-one basis, enabling participation in the company's upside during events such as an initial public offering (IPO). These rights are primarily defined in the company's articles of incorporation and shareholder agreements. Canadian securities laws govern the issuance of these securities:

• requiring compliance with regulations; and
• in certain cases, necessitating filings with securities commissions.

Furthermore, corporate laws mandate that any alterations to share classes or rights receive approval from the affected shareholders.

5.3 What anti-dilution measures or rights (eg, pre-emptive rights, down-round protection) typically feature in venture capital equity investments in your jurisdiction?

Commonly employed anti-dilution mechanisms include pre-emptive rights and down-round protections.

Pre-emptive rights: These rights grant existing shareholders the opportunity to purchase additional shares in subsequent financing rounds, allowing them to maintain their proportional ownership in the company.

Down-round protections: These provisions adjust the conversion price of preferred shares when new shares are issued at a price lower than that paid by existing investors. The two primary types of down-round protections are as follows:

• Full ratchet: This mechanism adjusts the conversion price of existing preferred shares to match the lower price of the new issuance. For example, if an investor initially purchased shares at C$1 each and the company later issues shares at C$0.50, the conversion price for the existing investor's shares is adjusted to C$0.50. While this offers strong protection for investors, it can significantly dilute founders and other shareholders.
• Weighted average: This approach recalculates the conversion price based on a weighted average formula that considers the lower price and the number of new shares issued. It is generally more favourable to founders and existing shareholders than the full ratchet method. The weighted average can be:
• • broad based, which includes all outstanding shares, options and convertible securities in the calculation, resulting in a more moderate adjustment; or
  • narrow based, which considers only a limited set of shares – typically just the currently outstanding preferred shares, leading to a more pronounced adjustment than the broad-based method.

5.4 What are the key features of the liability regime (eg, representations and warranties, disclosure concept, liability caps, remedies) that applies to venture capital investments in your jurisdiction?

In Canadian venture capital transactions, liability considerations are primarily governed by the representations and warranties outlined in investment or subscription agreements. Investors typically require comprehensive representations and warranties from the company regarding its:

• financial condition;
• operations; and
• compliance with applicable laws.

Companies will often negotiate limitations such as materiality qualifiers and knowledge qualifiers to narrow the scope of these representations. Investors will be required to make certain representations and warranties in favour of the company in order to ensure compliance with applicable securities laws.

5.5 What key transfer rights and restrictions (eg, lock-up period, right of first offer/right of first refusal, drag/tag-along rights, purchase options) typically feature in venture capital investments in your jurisdiction? Are (reverse) vesting/good and bad leaver provisions commonly applied to founders in your jurisdiction? If so, how are these typically structured?

In Canadian venture capital agreements, several key transfer rights and restrictions are employed to regulate share ownership transitions and protect stakeholder interests:

• Lock-up periods: These provisions prevent shareholders from selling their shares for a specified duration following an IPO or other significant event.
• Right of first refusal: Before selling shares to external parties, a shareholder must first offer them to existing shareholders under the same terms.
• Right of first offer: A selling shareholder must first propose the sale to existing shareholders before seeking external buyers.
• Drag-along rights: Majority shareholders can compel minority shareholders to join in the sale of the company, ensuring that potential buyers can acquire 100% ownership without minority opposition.
• Tag-along rights: Minority shareholders have the right to join a sale initiated by majority shareholders, selling their shares under the same terms.
• Purchase options: Agreements may include provisions allowing the company or existing shareholders to buy back shares from departing shareholders, often triggered by specific events such as:
• • termination of employment; or
  • breach of contract.

Regarding founders, reverse vesting and good/bad leaver provisions are commonly applied to align their interests with the success of the company:

• Reverse vesting: Founders' shares are subject to vesting over a predetermined period. If a founder departs before full vesting, the company can repurchase unvested shares.
• Good leaver/bad leaver provisions: These clauses define the terms under which departing founders retain or forfeit their shares:
• • Good leaver: Typically includes departures due to circumstances beyond the founder's control, such as:
  • • death;
    • disability; or
    • retirement.
  • Good leavers may retain all or a portion of their vested shares.
  • Bad leaver: Encompasses departures due to reasons such as:
  • • resignation within a specified period;
    • termination for cause; or
    • breach of contract.
  • Bad leavers often forfeit their unvested shares and may be required to sell vested shares at a discounted rate or nominal value.

These mechanisms are structured to:

• promote stability;
• protect investments; and
• ensure that key stakeholders remain committed to the company's long-term objectives.

5.6 What management incentives (eg, equity, options, phantom shares) typically feature in venture capital investments in your jurisdiction?

In Canada, commonly employed mechanisms include:

• stock options;
• restricted stock units (RSUs); and
• phantom shares.

Stock options grant employees the right to purchase company shares at a predetermined price, known as the exercise or strike price, after a specified vesting period. This approach allows employees to benefit from any increase in the company's share value over time.

RSUs are another form of equity compensation where employees receive shares upon meeting certain vesting conditions, such as tenure or performance milestones. Unlike stock options, RSUs upon vesting represent actual shares granted to the employee.

Phantom shares, also known as phantom stock or shadow stock, provide employees with cash bonuses equivalent to the value of a specified number of company shares, without conferring actual ownership. These plans are particularly beneficial for private companies that wish to reward employees based on the company's performance without diluting existing shareholders' equity. Phantom shares can be structured to pay out upon specific events, such as a sale or IPO.

6 Debt investment terms

6.1 What terms typically feature in non-equity venture capital investments in your jurisdiction?

In Canadian venture capital, non-equity investments often involve instruments such as convertible debentures and simple agreements for future equity (SAFEs), each which has distinctive terms.

Convertible debentures are debt instruments that accrue interest and have a set maturity date. They offer investors the option to convert the debt into equity, typically during a subsequent financing round or upon reaching the maturity date. Key terms include the following:

• Interest rate: The annual rate at which interest accrues on the principal amount until conversion or repayment.
• Maturity date: The deadline by which the company must repay the debt or convert it into equity.
• Conversion terms: Conditions under which the debt converts to equity, often triggered by future financing events.
• Valuation cap: A ceiling on the company's valuation at which the debt converts to equity, protecting early investors from excessive dilution.
• Conversion discount: A percentage discount on the price per share during conversion, rewarding early investment.

While convertible debentures provide startups with immediate capital without immediate equity dilution, they carry the obligation of debt repayment if conversion does not occur, potentially pressuring the company's cash flow.

SAFEs are agreements where investors provide capital in exchange for the right to acquire equity at a future date, typically during a subsequent financing round. Unlike convertible debentures, SAFEs are not debt instruments and do not accrue interest or have a maturity date. Key features include a valuation cap and/or discount rate – terms that determine the price per share at which the investment converts to equity, ensuring favourable conditions for early investors.

SAFEs simplify the fundraising process by eliminating the need for immediate valuation discussions and debt obligations, making them attractive for early-stage startups.

6.2 How are such non-equity investments typically treated in the event of (a) an equity investment, (b) a change of control and/or (c) maturity?

In Canadian venture capital, non or quasi-equity instruments such as convertible debentures and SAFEs are structured to address various corporate events:

• Equity investment: Upon a subsequent equity financing round, convertible debentures typically convert into shares, often at a discount to the new round's price or subject to a valuation cap. SAFEs also convert during such financing events, granting investors equity based on predetermined terms such as valuation caps or discounts.
• Change of control: In events such as mergers or acquisitions, convertible debenture holders may have the option to convert their debt into equity immediately or may be entitled to early repayment, depending on the agreement's terms. SAFEs typically stipulate that in a change of control scenario, the investor can either:
• • convert the SAFE into equity immediately before the transaction; or
  • receive a predefined cash payout.
• Maturity: Convertible debentures have a set maturity date; if conversion has not occurred by this time, the company must repay the principal along with any accrued interest. SAFEs, conversely, lack a maturity date, eliminating the pressure of repayment and allowing conversion to equity to occur during future financing rounds or liquidity events without a fixed deadline.

7 Governance and oversight

7.1 What are the typical governance arrangements of venture capital portfolio companies?

In venture capital portfolio companies, governance arrangements commonly include negotiated control through board composition and protective provisions. Venture capital investors typically secure at least one seat on the portfolio company's board of directors, allowing them to participate directly in key strategic decisions. In early-stage companies, founders often retain board representation, while later-stage rounds may introduce independent directors to provide objective oversight. To further safeguard their investment, investors negotiate protective provisions – contractual rights that require investor consent for significant corporate actions. These can include:

• issuing new shares;
• undertaking mergers or acquisitions;
• amending corporate documents;
• approving large capital expenditures; or
• incurring debt.

7.2 What legal considerations should venture capital investors take into account when putting forward nominees to the board of portfolio companies?

Foremost, fiduciary duties require that nominee directors act in the best interests of the corporation as a whole, not solely representing the interests of the nominating shareholder.

Conflicts of interest are a significant concern, particularly when the nominating investor's objectives diverge from those of other shareholders. Nominee directors:

• must proactively disclose any potential conflicts; and
• may need to recuse themselves from discussions or decisions where such conflicts exist.

The handling of confidential information presents another issue. Nominee directors might feel an obligation to share insights with their appointing investors; however, they are bound by duties of confidentiality to the corporation. Any information sharing must be explicitly authorised by the board and conducted in a manner that does not compromise the corporation's interests.

7.3 Can a venture capital investor and/or its nominated directors typically veto significant corporate decisions of a portfolio company? If so, what are the common types of corporate decisions over which a venture capital investor might request veto rights?

Yes, venture capital investors in Canada can typically veto significant corporate decisions of a portfolio company through contractual protections outlined in the shareholders' agreement or articles of incorporation. These veto rights (also known as protective provisions or reserved matters) are often tied to the investor's ownership percentage or board representation.

Common decisions over which investors may request veto rights include:

• the issuance of new shares or securities;
• amendments to the articles or share capital structure;
• mergers, acquisitions or the sale of substantially all assets;
• the incurrence of significant debt or capital expenditures;
• the declaration of dividends or distributions;
• changes to business strategy or entering new lines of business;
• the appointment or removal of senior executives;
• the dissolution or winding up of the company; and
• changes to option pools or key employee equity.

7.4 What information and reporting rights do venture capital investors typically enjoy in your jurisdiction (by law and contractually)?

In Canada, venture capital investors typically obtain information and reporting rights contractually, as statutory rights under corporate law are limited. While shareholders may have minimal rights to access certain corporate records (eg, shareholder registers and financial statements under the Canada Business Corporations Act or provincial equivalents), venture investors generally negotiate broader rights as part of their investment.

These rights are typically set out in the shareholders' agreement and may include:

• quarterly and annual financial statements;
• annual budgets and business plans;
• management reports and key performance indicators;
• notice and minutes of board and shareholders' meetings;
• access to inspect company books and records; and
• ad hoc updates on material developments.

Major investors or those holding a minimum ownership threshold (eg, 5% or 10%) may also negotiate enhanced information rights, such as access to auditors or regular calls with management.

7.5 What other legal tools and strategies are available to venture capital investors or other minority investors to monitor and influence the performance of portfolio companies?

In Canada, venture capital and minority investors use a range of legal tools and strategies to monitor and influence the performance of portfolio companies beyond information rights and board representation. These tools are typically contractual and are negotiated in the shareholders' agreement and related investment documents.

Key strategies include:

• board seats or observer rights, allowing investors to participate in strategic discussions and receive direct updates from management;
• consent or veto rights over major corporate actions (eg, financings, mergers or budget approvals), ensuring that investors have a say in key decisions;
• protective provisions in the company's articles of incorporation to enforce rights related to share classes, preferences or governance changes;
• participation rights (pre-emptive rights), to maintain ownership in future financing rounds;
• exit-related rights, such as drag-along, tag-along or put options, allowing control over liquidity events; and
• audit rights or rights to inspect books and records, providing deeper financial oversight.

Investors may also:

• require founder vesting; or
• impose performance milestones tied to continued equity ownership or access to capital.

8 Exit

8.1 What exit strategies are typically pursued by venture capital investors in your jurisdiction?

In Canada, venture capital investors typically pursue three main exit strategies:

• mergers and acquisitions;
• initial public offerings (IPOs); and
• secondary sales.

Mergers and acquisitions are the most common exit route, where the portfolio company is acquired by a strategic buyer or private equity firm.

IPOs occur less frequently but remain an attractive option for high-growth companies, particularly in sectors such as technology or life sciences. Going public offers liquidity and potential for continued growth but involves significant regulatory, market and timing challenges.

Secondary sales allow early investors to sell their shares to new investors (eg, late-stage funds or strategic investors) before a broader exit. These are common in larger rounds or recapitalisations and can provide partial liquidity.

Investors may also exit through management buyouts or redemptions, although these are less common and typically negotiated case by case.

8.2 What specific legal and regulatory considerations (if any) should be borne in mind when pursuing each of these different strategies in your jurisdiction?

In Canada, each venture capital exit strategy carries distinct legal and regulatory considerations.

For an M&A deal, legal review of the shareholders' agreement is essential to enforce drag-along and tag-along rights, ensuring that all shareholders participate or consent. The transaction must comply with:

• corporate approvals;
• employment law (if employees are affected); and
• Competition Act thresholds for merger notification, if applicable.

In an IPO, the company must meet requirements under applicable securities law, including:

• filing a prospectus; and
• undergoing regulatory and financial due diligence.

This process involves:

• strict disclosure obligations;
• potential restructuring (eg, converting preferred to common shares); and
• compliance with ongoing public company governance standards.

Lock-up agreements may restrict post-IPO share sales.

For secondary sales, securities laws require reliance on exemptions (eg, accredited investor exemption under NI 45-106). Investors must also observe right of first refusal or transfer restrictions outlined in the shareholders' agreement.

9 Tax considerations

9.1 What are the key tax considerations in relation to venture capital equity investment in your jurisdiction?

In Canada, venture capital equity investments involve several key tax considerations for both investors and portfolio companies.

For Canadian investors, gains from the sale of shares are subject to capital gains tax, with only 50% of the gain taxable. Investments in qualifying Canadian private companies may also be eligible for the Lifetime Capital Gains Exemption, currently over C$1 million per individual, if shares meet criteria for qualified small business corporation status.

Non-resident investors are subject to Canadian tax on capital gains only if the shares are classified as 'taxable Canadian property', which typically applies if the company holds significant Canadian real estate. In many cases, tax treaties (eg, Canada-US treaty) may eliminate this liability.

On the corporate side, issuing equity does not trigger immediate tax consequences, but employee stock options and equity compensation plans must be structured carefully to avoid adverse tax treatment.

9.2 What are the key tax considerations in relation to venture capital debt investments in your jurisdiction?

In Canada, venture capital debt investments – such as convertible notes and venture debt – raise several important tax considerations for both investors and portfolio companies.

For investors, interest income earned on debt instruments is fully taxable as income, not capital gains. Canadian resident investors must include interest in income on an accrual basis. For non-resident investors, withholding tax (typically 25%) applies to interest payments unless reduced by a tax treaty (eg, 0% under the Canada-US treaty if conditions are met).

Convertible debt or hybrid instruments pose additional considerations. From a tax perspective, the treatment of accrued interest upon conversion can vary based on the terms and conditions set out in the convertible instrument. If accrued interest is specifically capitalised and converted into equity, this event typically results in the interest amount being treated as paid for tax purposes. If the accrued interest is explicitly waived or forgiven upon conversion, the investor may have no taxable income inclusion from that interest, but the borrower will lose the corresponding interest deduction. Additionally, debt forgiveness rules could be triggered for the issuer, potentially resulting in income recognition.

9.3 What are the key tax considerations in relation to equity-related incentive schemes in the context of venture capital investments in your jurisdiction?

In Canada, venture capital investors must carefully evaluate key tax considerations associated with equity-related incentive schemes – particularly employee stock options and other share-based compensation plans. Stock options granted to employees are typically taxed at exercise, with the difference between the exercise price and the share's fair market value included as taxable employment income. Importantly, a 50% deduction is often available, effectively reducing the employee's taxable benefit by half, provided that certain conditions under the Income Tax Act are satisfied.

Investors should note recent amendments limiting this deduction to the first C$200,000 of stock options vesting annually for certain larger, non-Canadian controlled private corporations.

10 Disputes

10.1 What kinds of disputes typically arise in relation to venture capital investments in your jurisdiction and how are they typically resolved?

In Canada, disputes in venture capital investments can arise at various stages of the investment lifecycle. The most typical disputes involve the following:

• Governance conflicts: Disagreements between investors and founders over business strategy, performance or board decisions, especially where investor-appointed directors hold veto rights or reserved matters.
• Equity and dilution issues: Misunderstandings related to cap tables, option pool adjustments or anti-dilution protections during follow-on financing rounds.
• Exit disputes: Conflicts over:
• • triggering or enforcing drag-along or tag-along rights;
  • valuations; or
  • the timing of a sale or initial public offering.
• Breach of contract or fiduciary duties: Claims involving:
• • misrepresentation;
  • breach of shareholders' agreements; or
  • failure of directors (including investor nominees) to act in the company's best interests.
• Employment-related issues: Disputes with founders or key personnel over:
• • equity vesting;
  • termination; or
  • good/bad leaver provisions.

These disputes are typically resolved through negotiation or mediation, often guided by the terms in the shareholders' agreement. Many agreements include arbitration clauses to avoid public litigation and preserve confidentiality.

11 Trends and predictions

11.1 How would you describe the current venture capital landscape and prevailing trends in your jurisdiction? What are regarded as the key opportunities and main challenges for the coming 12 months?

The Canadian venture capital landscape remains robust, characterised by resilience amid global economic uncertainties. Predominant investment sectors include:

• AI;
• fintech;
• cleantech; and
• healthtech.

Each of these is attracting significant capital due to innovative growth opportunities. Prevailing trends include:

• increased cross-border investment activities, especially with US-based venture firms; and
• a marked focus on integrating environmental, social and governance factors into investment strategies.

Additionally, market conditions have driven a cautious approach towards early-stage and seed funding, prompting investors to prioritise thorough due diligence.

For the coming 12 months, significant opportunities lie in growth-stage ventures, particularly within technology-oriented industries exhibiting scalability and innovation. The cleantech and renewable energy sectors are also poised to benefit substantially from government-backed incentives and policy support. Conversely, key challenges include:

• persistent market volatility;
• fluctuating valuations;
• uncertainty regarding US tariffs; and
• potentially constrained liquidity and exit options resulting from a more selective funding environment.

11.2 Are any developments anticipated in the next 12 months, including any proposed legislative reforms in the legal or tax framework?

In the next 12 months, Canada's venture capital landscape is poised to navigate significant legislative reforms impacting both taxation and foreign investment.

The Lifetime Capital Gains Exemption will increase to C$1.25 million for dispositions occurring on or after 25 June 2024, with indexation resuming in 2026.

Additionally, amendments to the Investment Canada Act, enacted through Bill C-34, have introduced a pre-implementation filing requirement for investments in prescribed business sectors. The Minister of Industry now has enhanced authority to:

• impose conditions during national security reviews;
• accept undertakings to mitigate risks; and
• extend review periods.

Furthermore, updated guidelines incorporate an 'economic security' assessment factor, evaluating whether a proposed investment could undermine Canada's economic security. This includes considerations of Canadian businesses's role in innovation ecosystems and supply chains.

These developments necessitate that investors and portfolio companies engage in proactive tax planning and thorough due diligence to navigate the evolving regulatory environment effectively.

12 Tips and traps

12.1 What are your tips to maximise the opportunities that venture capital presents in your jurisdiction, for both investors and portfolio companies, and what potential issues or limitations would you highlight?

To maximise venture capital opportunities in Canada, investors and portfolio companies should adopt strategic structuring and proactive diligence. Investors are advised to carefully structure investments:

• utilising flexible instruments such as preferred equity or convertible notes; and
• ensuring that protective provisions such as anti-dilution rights, liquidation preferences and comprehensive governance mechanisms are clearly documented.

For portfolio companies, maintaining robust corporate governance and accurate financial records from inception:

• enhances investor confidence; and
• facilitates future funding rounds.

Both parties should leverage available tax incentives, including Scientific Research and Experimental Development credits and the Lifetime Capital Gains Exemption.

However, limitations include potential regulatory complexity arising from Canada's federal-provincial structure, necessitating careful compliance management across jurisdictions. Cross-border investments can trigger intricate tax considerations, particularly withholding taxes and reporting obligations, demanding specialised legal and tax advice to avoid unintended liabilities. Additionally, venture investors must remain mindful of liquidity constraints given Canada's relatively modest initial public offering market and limited secondary transaction opportunities. Prudent management of exit expectations and contingency planning for prolonged investment horizons are therefore critical to successful venture capital participation in Canada.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.