When There's Trouble on the Hill, Lawyers and VCs Should Take a Back Seat to Startup Entrepreneurs and Their Investors

Even though I haven't written about them, there are other provisions in Senator Dodd's bill that I and other lawyers don't like. For instance, the bill would broaden aider-and-abettor liability and make it easier for plaintiffs to sue lawyers and accountants in securities fraud cases. There are good reasons this kind of exposure was narrowed in the past, and good reasons not to turn back the clock on this issue, either; but I'm not talking about that on this blog.

Similarly, venture capitalists recently worried about proposals by the US Treasury that called on extending investment adviser registration to advisers of private funds, including VC funds. VCs appear to have dodged the bullet on that; venture capital fund advisers are exempt from private fund registration requirements as drafted in both the Frank bill in the House and the Dodd bill in the Senate. TechFlash just reported, however, that the NVCA continues to be worried about proposals to raise tax rates on the carried interest component of compensation earned by managers of venture capital funds.

I don't mean to suggest that it is not important to make sure that venture capital fund managers, lawyers, accountants and other service professionals are able to earn a living in order to effectively play their roles in the tech startup ecosystem. It is important.

Similarly, I don't mean to say that proposals impacting professionals would have zero impact on either (a) capital formation generally, or (b) startup company financing in particular. No doubt all such proposals would, and therefore could indirectly harm startups.

However, we lawyers, accountants, venture capitalists and other vendors are serving a segment of our economy that is driven by people whose journey in life "exists in the tiny space between madness and genius," whose concerns are not primarily monetary (though, longer term, it might be good to restore financial incentives to technology innovation), and who are so busy taking risks a typical service professional would recoil from, they are not necessarily paying attention to proposed legislation in the same, jealous way service professionals do.

We startup service providers are special, too, though: we know our tech entrepreneurs are a source of energy, innovation and pride; we also know that America's chance to not be overtaken by bigger political economies in the 21st Century depends on how well we continue to broaden the tent of hospitality for innovation. America should continue to be the place where business renegades stick their thumbs in the eyes of folks who like things the way they are. So in this time of tumultuous financial change, regulatory reform and a government seeking new revenues, it behooves we servants of the entrepreneur to speak with a coordinated sense of priorities.

I'm not smart enough to prioritize the full public policy agenda for the startup world that Fred Wilson summarized last week (including the startup visa movement and net neutrality). When it comes to how we support entrepreneurs with financing for startups, however, I'll throw out the following list, in a suggested order of importance:

• Ask the government to make good on the Obama Administration proposal to eliminate capital gains tax on qualified small business stock. Joe Wallin has a good post on this.

• Leave the accredited investor thresholds alone, at least for the next few years; the current levels are protective enough, and raising them now would keep out many professionals who will otherwise naturally cycle into angel investing.

• Save Rule 506 under Reg D from being again subject to substantive state securities regulation; as much as possible of the money raised in all-accredited seed financings should go to productive uses, and not to doubled or tripled attorneys fees.

This list might be added to or revised. I am sure, however, that aider-and-abettor liability for lawyers and accountants, and higher taxes on VC management, are not as important concerns for startups or for innovation in our country than any of the three initiatives listed above.