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Increase available startup capital with an angel tax credit

Kevin LearnedRigorous research has shown that companies five years and younger are responsible for the vast majority of job creation in our country. The Kaufman Foundation released a new study on this topic in September. Simply put, if you want to increase jobs in an economy, increase the number of startups.

The Boise Angel Alliance is an organization of around 100 individual angels. The purpose of the organization is to educate angels on best practices in angel investing, and to assist in making angel capital available to Treasure Valley startups. Operating through angel funds, pools of capital raised from local investors, $2.4 million of investment capital has been invested over the last eight years in 20 local companies. Since the investments were made, as of December 31 those 20 companies have created approximately 330 full time equivalent jobs. If the average position pays $45,000, that’s an impact before multiplier effect of $15 million a year in our economy.

Startups require capital. Idaho doesn’t have enough equity capital for its growth companies. A number of dedicated folks are working to increase the capital available. Jessica Whiting of Startup Grind arranged for Scott Kupor, managing partner of renowned Silicon Valley venture capital firm Andreesson Horowitz to come to Boise on March 9. Brad Bertoch, CEO of Salt Lake-based Wayne Brown Institute has brought its programs to Idaho to help connect Idaho companies to Utah angels and venture capitalists. And the Idaho Technology Council has had an initiative almost since its founding to increase investment capital in the state.

While all these efforts are good and much appreciated, there is a simple public policy step that will directly impact the availability of startup capital. That step is to give a state income tax credit for equity investments in startup companies. At least 18 states and all of Canada does so. For example, Minnesota’s Angel Tax Credit provides a 25-percent credit to investors or investment funds that put money into startup companies focused on high technology, new proprietary technology, or a new proprietary product, process or service in specified fields. The maximum credit is $125,000 per person, per year ($250,000 if filing jointly). The credit is refundable. Residents of other states and foreign countries are eligible.

How does an angel tax credit work? It’s simple. An angel makes an equity investment in a startup and receives a reduction in his or her state income taxes equal to some percentage of the investment. In Minnesota’s case, it’s a 25 percent credit. Minnesota is so committed to this, the tax credit is refundable. That is, an investor with no Minnesota tax due can get a refund equal to 25 percent of his or her investment, subject to the maximums. This means if I invest $100,000 into a qualifying Minnesota company, the state of Minnesota will send me a check for $25,000. The practical effect is I receive a $100,000 interest in the Minnesota company for a net $75,000 investment.

What do the taxpayers of Minnesota get out of this? They get a more robust startup economy, which will increase jobs, provide opportunity to its citizens, and ultimately increase taxes paid by those companies and their employees to the state of Minnesota.

An angel investment tax credit is an elegantly simple means of stimulating investment in our Idaho companies. The free market makes the investment decision. His or her tax savings increases the investor’s available capital. The company gets the investment. Our citizens get the jobs. Our state gets the tax revenue once the company begins to grow.

Kevin Learned is co-founder and director of Boise State’s Venture College, past president of the Boise Angel Alliance, and a member of Loon Creek Capital Group which helps local communities create angel funds to support their entrepreneurs.

 

 

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One comment

  1. mhollenbeck@proskriptive.com

    I enjoyed the article very much Kevin, thanks for your thoughts. Anything we can do to stimulate the availability of investment capital for local startups has my support. Even with a 25% tax credit the State comes out a big winner for their support of this incentive to spur investment in startups.
    As an aside, I think you can safely up your $45K average annual salary estimate considerably. Even in Boise it’s darn near impossible to get the type of tech talent startup companies need for twice that amount.