Taxes are a major determinant of the returns on any investment, and especially for an entrepreneur whose company is often his or her primary vehicle of wealth creation.
Two significant changes to the tax code are likely to occur in the next few years, both of which will directly affect entrepreneurs:
The tax cuts passed by Congress in 2001 and 2003 expire at the end of 2010.
The recently enacted health care reform initiates additional taxes on all investment gains starting in 2013, including the extension of Medicare taxes to all investment gains – effectively adding an additional 3.8% to the long term capital gains tax rate.
We have published a brief white paper which highlights how an entrepreneur could take taxes into consideration when contemplating a capital raise, and how he or she might maximize the value of the after-tax proceeds from a minority recapitalization.
No entrepreneur should make significant changes in the long term plans for his or her business based solely on likely changes in the tax code. However, if you or your shareholders are currently considering a capital raise and/or would like to consider realizing some liquidity on part of your investment over the next 12 months, it may well make sense to accelerate the timing to beat the December 31, 2010 and/or 2013 deadlines.
A recent editorial in Investors Business Daily entitled The Tax Tsunami On The Horizon maintains that there are three upcoming “waves” of taxes, including those we mention above: (1) the expiration of various tax cuts enacted last decade, (2) new taxes designed to pay for health care reform, and (3) the alternative minimum tax’s widening net, upcoming tax hikes on employers, and the loss of deductions for tuition.
Rhys Williams is an old friend of BPV and both a successful biotech entrepreneur and a founding member and President of one of the largest and most successful statewide angel investing groups in Florida (New World Angels). So we were delighted to hear that Rhys was recently invited by Senator George LeMieux (R-FL) to testify at the “Innovation in America: Opportunities and Obstacles” hearing before the U.S. Senate Committee Subcommittee on Competitiveness, Innovation, and Export Promotion. Florida’s entrepreneurial community could not have asked for a better spokesman on issues of importance to early stage entrepreneurs in Florida and throughout the country. And kudos to Senator LeMieux for inviting Rhys to speak.
If you want to watch Rhys’s testimony, it can be seen from minute markers 107:16 to 113:30 of the hearing’s webcast at the Senate Committee’s site; and his Q&A session (where he really shines in our opinion) runs from 125:44 to 128:44. A transcript of his testimony is also available at the site for those who prefer some enjoyable reading without the interruptions. In addition to making compelling points, Rhys does an excellent job dealing with the standard difficulties of that environment: having your thunder stolen by earlier witnesses and getting squeezed for time at the end so the Senators get enough of their own “air time”.
For those who want the “Rhys’s Points for Dummies” summary, he offered six specific recommendations which, from the perspective of angel investors and early-stage entrepreneurs, would improve both innovation and the nation’s overall economic performance:
FDA Reform. Fill vacancies more quickly, speed up regulatory review, and switch from the “zero defect” to the “calculated risk” model. In recent years, high profile drug safety incidents have hamstrung regulators – costing years of product development time and burning up precious capital.
Address the backlog of patents. The US Patent & Trademark Office has a backlog of up to 3.5 years – which lengthens time to market, increases legal costs and creates uncertainty. In addition to working the backlog with additional resources, expedited reviews should be granted for strategic sectors and IP with greater risk of piracy. Also push for reciprocity and enforcement of IP violations within foreign jurisdictions.
Tax reform. The current federal tax framework dampens innovation and competitiveness. In addition to lowering certain rates tied to investment activity (capital gains, carried interest), we ought to create tax credits for: innovative companies, angel investors, and certain specific business activities (capital attracted, employment growth, capital expenditures, etc) in order to promote a true, sustainable “growth agenda.”
Simplify federal and state securities regulations. Early stage firms are forced to devote too much time and attention to regulations intended for much larger firms.
Promote the “Entrepreneurial Ecosystem”. Develop and integrate the local and regional infrastructure for the commercialization of R&D, the growth of private angel investor networks, and the provision of matching grants to qualified SBIR/STTR grant recipients.
Preserve the missions of SBIR/STTR. (Small Business Innovation Research and Small Business Technology Transfer) Protect their funding from encroachment by larger firms.
Thank you to Rhys for traveling to D.C. on his own dime and making the case so succinctly. Everyone involved in Florida’s early stage entrepreneurial culture would benefit from echoing these points to our state and national legislators and regulators as often as possible as we debate how to ignite renewed economic growth in America.
Some excellent advice on new technologies: even when there is no immediately apparent benefit to your business, having employees dabble a bit with “the technology of the era” helps them imagine what might be technologically possible.
Dreaming big, innovating in processes/systems unrelated to the technology, spotting early trends for customers and vendors (or portfolio companies, present and future!) – these are the positive side effects from playing with not-yet-ready-for-our-business technologies.
Tom Glocer, CEO of Thomson Reuters, shares the story of giving his staff first-generation mp3 players (9 years ago) for Christmas and challenging them with a “Christmas assignment.”