Battle-weary proponents of Minnesota’s historic $60 million angel tax credit had a simple message for the state’s entrepreneurial community:
Now that we passed the darn thing, you better use it!
“We’ve passed the baton onto you,” Sen. Kathy Saltzman (D-Woodbury) told the audience who gathered in Eden Prairie Monday to learn about the tax credit.
“Make good use of it,” said Rep. Tim Mahoney (D-St. Paul).
“If you don’t, it will most surely disappear,” said Jay Hare, a Minneapolis-based analyst with PricewaterhouseCoopers.
Using the credits, though, might prove harder that it looks. Saltzman correctly noted there “will be a few bumps along the road.” After all, Minnesota never operated such a program before.
So here are 10 things you should know about the angel credits in no particular order.
1. My startup is worth a billion dollars … Not! Don’t start getting greedy just yet. Given the weak economy, the credits will not boost the value of your startup, Hare said. What they will do is increase the chances that angels will fund the company. But most likely, angels will still drive a hard bargain for this simple reason: they have money and you don’t.
2. Got Expertise? Your bowling buddy might have $50,000 lying around, but he or she might not be the best investor. Ideal angels bring money and brain power to the table so you might want to find an angel with special connections or knowledge related to your chosen industry.
3. Angel GPS — So where do you find these people? Well, that’s the hard part. Investors in Minnesota tend to be kind of shy, said John Alexander, president of TC Angels. Unless you want people constantly bugging you for money, you would stay incognito, too. Hopefully, the credits will encourage angels to form more high-profile groups like TC Angels and Rainsource Capital, he said.
4. Beware — A cottage industry of brokers might offer to help you find angels for a commission. Don’t bother, said Dan Mallin, an entrepreneur and investor who co-founded the Minnesota Cup. Such commissions are not a good use of your capital and will turn off potential investors, he said.
5. No double dipping — Investors receive 51 percent of their annual income from companies that are not eligible for the credit. That also collectively applies to spouses who file a joint tax form.
6. No wage skimping — The law requires companies to pay their employees at least 175 percent above the federal poverty level, or $18.55 an hour. Hare says that might turn off some investors. What’s also unclear is whether that law applies to contract workers. Dan McElroy, commissioner of the state Department of Employment and Economic Security (DEED), fears some companies might try to game the requirement by outsourcing a lot of the work.
7. You snooze, you lose — The law offers a finite pool of credits every year, $11 million in 2010 and $12 million annually from 2011 to 2014. Like Black Friday shoppers who sleep in front of Best Buys hoping to score an $199 laptop, DEED will likely see a flood of applications early in the tax year. Wait too long and the pool might already be drained before you can stick your toes in. DEED will start accepting certification applications August 1.
8. You walk, you lose — Investors must stick with the company for at least three years. Otherwise, you repay the tax credits: 100 percent the first year, 80 percent the second year and 60 percent the third.
9. Real people — To prevent large companies from claiming the credits, the law says only “natural” investors can receive credits. Unfortunately, that also excludes money from individual retirement accounts and family trusts.
10. (Fill in the blank) need not apply — The credits only apply to “high-technology” ventures like medical devices, biotechnology and wind power. Banks, real estate, accounting, political lobbying, insurance, hospitality types are out of luck. McElroy earned a few laughs when he noted another prohibited group, one that’s not yet listed in DEED’s Web site: sports stadiums.
Gee, whatever is he referring to?