Five Concrete Ideas to Reduce Federal Barriers for Entrepreneurs

Startup America looks to be primarily a private sector initiative. We attendees at the Angel Capital Association 2011 Summit in Boston are looking forward to hearing Scott Case, CEO of the Startup America Partnership, speak on this tomorrow morning.

But there is a government role in the Startup America initiative, as well.

One goal stated by the White House at the launch of Startup America two months ago was that it should "identify and remove unnecessary barriers to high-growth startups." That question appears to have since been reformulated on an SBA sponsored site to read, "What concrete ideas could reduce federal barriers for entrepreneurs trying to start and scale companies?"

Many creative ideas have been proposed, some for new programs and many for tax incentives. These ideas have merits and drawbacks, and some of the more creative will no doubt on a different day be discussed on this blog.

800px-Construction_Worker_moving_concrete_barrier_DSC_0474But today I mean to be boring and literal. Let's take that concern initially stated by the White House at face value. Let's put creative proposal for new programs and new tax breaks to one side, and simply answer the question asked.

There are existing federal statutes and regulations, on the books today, which, regardless of intent or merit as applied to larger corporate activity, make no sense in Startupland.

Here is a list of five concrete ideas to reduce federal barriers for entrepreneurs trying to start and scale companies:

  • Repeal the prohibition on general solicitation under the Reg D exemption. Private financing is taking place digitally and yet we still labor under an analog rule built for a time when to broadcast (via radio, TV or newspaper) could fairly be said to equate with public solicitation. Communication now is more about efficiencies in finding the right audiences for the particular information. Reg D works because of the accredited investor definition. That definition is fixed for the near term, and we should rely on it. As long as a financing is limited to accredited investors, it should not matter whether the angel or VC first heard about the company through AngelList, a tweet, a pitch forum, or in any other manner, in order for the financing to remain exempt under Reg D.
  • Fix the rollover period under Section 1045 of the Internal Revenue Code so that it's useful. This is an idea Tom Alberg brought up at the Nortwest Regional Meeting of the Angel Capital Association two months ago. Section 1045 could be to startup investing what Section 1031 ("like-kind exchanges") is to real estate. The impact of Section 1045 could be very powerful, especially now with the Section 1202 100% exclusion of capital gains tax for QSB stock held for 5 years. The problem is, though, that Section 1045 requires that proceeds be reinvested within 60 days. If the rollover period were more realistic, angels would have more opportunity to keep their startup investment capital in play.
  • Remove caps on H-1B visas. Note, this point is different from the Startup Visa movement, which is probably a very good idea but which represents a new initiative or an extension of existing law. The purpose of this list is to identify existing barriers.
  • Repeal 409A as it applies to fair market value stock option pricing for startups. Although big banks and multinational corporations may concoct clever schemes for deferring executive compensation, in a never ending game of deferring or avoiding taxes, startups don't price and issue stock options for such nefarious purposes. And yet they are caught in a complicated regulatory scheme designed for the next Enron. It really doesn't make sense for either the bootstrapped startup or the venture-backed pre-revenue company to be paying anywhere from $6,000 to $12,000 to have a 409A valuation done.
  • Reverse the presumption about 83(b) elections. Startup co-founders will often (should!) want to subject their shares to vesting requirements. To avoid being taxed incrementally on the value of their stock as restrictions lapse over time, they have to file 83(b) elections within 30 days of the issuance of their stock. There is no forgiveness for missing the filing. And as "old hat" and boilerplate as the process may be for lawyers and finance professionals, it can be a trap for new entrepreneurs and confusing even for those who have made 83(b) elections before. As Joe Wallin has blogged, this problem could be solved by reversing the presumption: as long as you pay fair value for your founders' shares, presume you've made an 83(b) election to take the tax impact now, rather than over x years, unless you make an affirmative filing to the contrary.

Some of the ideas above, and others, can be found at a sliver of a wiki on the topic on Quora. We may want to work to get these ideas, and others, posted on the SBA "barrier" clearinghouse.

Photo: Construction worker moving a concrete barrier, by Ben Aveling.

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