Yep, that's right! It doesn't necessarily mean throwing his canon background out altogether, because you can adapt it to the setting of the game. Characters like Buffy, Drusilla, etc can still be presumed to exist in the AU, it's just a matter of adapting the character's history to fit the setting. If it helps, you could try looking at the taken list and checking the applications of any characters you're familiar with to see how they adapted their canon to the game.