Y Combinator has reversed its controversial decision to exclude Canadian-incorporated startups from its standard $500,000 investment deal, according to reports emerging February 5.
The accelerator formally updated its policy on January 26, 2026, limiting accepted incorporations to the United States, Cayman Islands, and Singapore. The move forced Canadian founders to choose jurisdiction before product-market fit, a timing issue that enterprise investors flagged as premature risk loading.
The winter 2026 cohort reflected the policy's impact: zero Canadian-headquartered companies among 99 accepted startups. Y Combinator has historically funded at least 144 Canadian graduate companies, with pandemic-era cohorts including 9-15 Canadian startups each.
The capital access argument
Y Combinator CEO Garry Tan, who was born in Winnipeg, framed the original exclusion as pragmatic rather than political. "We're not saying Canadians should leave Canada. Where you are incorporated increases your access to capital. That's it," Tan stated in November.
The timing coincided with escalating Canada-US trade tensions, including tariff threats that complicated cross-border investment structures.
What changed in practice
Delaware C corporation formation runs approximately $500-1,000 in filing fees, plus annual franchise taxes starting at $400. Expedited processing adds $100-200. Canadian founders also face ongoing US tax filing requirements and potential double taxation without proper structuring.
These costs hit earliest-stage founders hardest. The policy effectively moved a late-stage decision (reincorporation after Series A traction) to day one.
The broader pattern
The reversal addresses a symptom, not the underlying trend. A September 2025 Leaders Fund study found only 32.4% of Canadian high-potential startups founded in 2024 remained headquartered in Canada, down from roughly 70% between 2015-2019.
That capital flow pattern persists regardless of Y Combinator's policy. The real question is whether Canadian tax treatment and foreign investment rules can compete with US structures at scale. History suggests they can't, but founders shouldn't be forced to answer before they've shipped.
Y Combinator has not yet issued formal guidance on how the reversal affects current applicants or whether winter 2026 Canadian founders can revert incorporations.