Tax Credits for Early-Stage Investors: It’s About Time.

This was originally a comment on an article in today’s Globe and Mail… but, it wouldn’t fit. So, we have a blog post now.

The Globe and Mail article can be read here.

My comments:

Disclosure: I’m the CEO of a technology startup, so view my comments through that lens. I’m also a proud Canadian who wants to generate wealth, jobs, and opportunities right here- instead of moving to silicon valley where I could go to a cocktail party one night and have a $4mm term sheet the next morning. I love my country that much.

This plan is a fantastic idea which should have been implemented five years ago (the startup landscape would have been a lot richer during the time period when the US startup scene was booming, ergo increased M&A activity in Canada today coming out of the recession).

To everyone who commented: this plan isn’t a government-sponsored fund, it’s a tax credit. Money here doesn’t directly go to new businesses, it’s used as a credit for investors. That’s a good thing: no new business wants big government involved in the decision-making process.┬áPersonally, I’d walk away from a government investment, no matter how big, if it involved a bureaucrat sitting on my board. Also good: the credit itself. Yes, it ‘benefits the rich’. That’s a good thing for startups, because angels and VCs in this country are VERY risk-averse. They don’t like to invest unless they’re sure the company is a home run- and it’s very, very difficult to be sure of this at the concept or early seed stage (read: before the company has significant revenues). Allowing accredited investors to write off 35% of their investment helps them hedge their risk, and reduce potential losses. Ie, if an angel takes a flier and invests $1m in a company which goes bust, their net loss is $650,000 instead of the full million. That could make the difference between a yes and a no for an angel investor looking to do a small cap deal.

Mark: I appreciate your comment and agree- but as a society, do we really want to encourage grandmothers or retirees to invest in startups? It’s a dangerous game for investors, half of all startups fail, and fail spectacularly- losing money for everyone. Small-cap, early-stage investing is better left to professional investors… not to people who will make a judgement call on whether or not they liked the entrepreneur/product. Family and friends still commonly invest in startups, but not having a write-off policy helps to ensure that these folks can afford to lose the money if things go south. If we want to encourage mom-and-pop investments, a better way would be to incentivize the OSC to change its rules and allow crowdsourced funding (ie, microinvestments into a private fund which would then professionally manage the fund and invest in startups).

The trickle-down effect from this policy would be overall beneficial to the economy. By encouraging small cap private investment in new business ($250,000 – $1mm is where this will have the most effect), job creation is increased. It’s not the government’s place to directly create jobs; that almost always leads to unsustainable gains in the labour market. It’s the government’s job to create the conditions which allow private enterprise to start and expand, thus creating jobs.

This tax credit incentive isn’t new to Canada; it’s been running in BC for a few years and is very successful. In that province, the trickle-down effect is such that for every dollar of government revenue lost to the tax credit, two dollars is directly created in corporate taxation. When you consider gains in other taxation, four dollars per dollar is created. That means that the program is self-sustaining (ie doesn’t cost the taxpayers anything), and actually generates economic activity (read: job creation).

But don’t take my word for it: start Googling. Do your homework, and read up on the concept behind what’s being proposed.

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