What do the startups want?

My friend Joe Wallin passed along a letter he and Dan Lear recently put together about a problem that exists for startups today. The problem is a potential funding gap.

I know what you're going to say, there is tons of money from venture capitalists funding startups... why would startups want money from a few non-professional investors when they can go straight for the big boys. I've spent most of my free time in the last eight months interviewing and writing up the interviews of some of the top angel investors in the world. I always dig into the question about what value an angel has in a world of venture capitalists. Often the very best angels answer that they establish a personal relationship with the founders that go far beyond future rounds of venture funding. These founders are still calling those early angel investors to talk about the business strategy after they've raised hundreds of millions of dollars. Granted, not every entrepreneur has a relationship with every angel like this, but these relationships are key to many entrepreneurial successes.

Many Venture Capitalists will tell you that it is a portfolio game and actually working with the entrepreneurs is a waste of time because most fail. It is true that when you design a portfolio to not benefit in any way from a personal touch that trying to have a personal touch later will not be helpful. At the same time, there are many angels who also use a portfolio approach to mimic venture capitalists and these angels can also be successful.

The key points in this letter, that startups want address both of these areas:

  • Allow unaccredited investors to invest up to 5% of their net-worth - I talk to a lot of investors that would like to invest in early stage but can't. What do they do instead? They invest in penny stocks, risky real estate deals, and other distressed assets. Our regulators have deemed all of these HUGE gambles ok for unaccredited investors and there are NO caps on portfolio percentages. Most responsible angels won't even touch that stuff. Similarly most responsible angels don't want more than 5-10% of their net worth invested in early stage companies.
  • Don't block intrastate crowdfunding - many states, Washington included, have intrastate crowdfunding rules being implemented. This is great if you are starting a company in and raising money from investors in your state. The problem is the internet, the SEC may try to block the use of the internet for intrastate crowdfunding.
  • General solicitation is a tough one - I'd love to see transparency from startups AND investors allowed in the open. I get that hedge funds or others may be out there waiting to scam grandma out of her money, but I get penny stock and real estate scam emails all the time. Look at $CYNK as a great example. There are a lot of really bad things happening under the current rules. General solicitation isn't going to make it worse.
  • Of course taxes - Allow startups to give employees equity without the tax burden. If a company and employee have to pay taxes at the point that equity is granted... but can't liquidate the equity, how can it be a taxable asset?
  • Tax incentives for investing in early stage - there is data for and against incentives leading to more job creation or investment. The interesting thing is that there is a lot more tax revenue lost at the mega-corporation level, Corporate effective tax rates of 5% - seriously? Yet I don't get a break for investing in a company so that they could hire a new developer?
  • 83(b) filings - what founder has the money to pay taxes on their founder stock at the time it vests? They are putting everything into feeding their family and running their business. Those shares won't have value unless they can grow their business. It seems the default should be no filing and wait for a bigger tax payday when the founders build a great company.

 

I signed and sent a copy of this letter to my representatives. Have a read for yourself, print, sign, send... or write a letter of your own that addresses some of these points that you agree with.

Find your representatives by zipcode, give them a call and send them a copy of this letter.

From Startups Across America by rightbrainlaw

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  1. Pingback: You don’t have enough money | Josh Maher's Blog

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