Editor’s Note: This is a guest post from William Fisher, a partner at Treetop Ventures in Omaha, in response to the recent implementation of the Nebraska Angel Investment Tax Credit.
Outside of this post, Fisher is a regular guest contributor to Silicon Prairie News. In his series, View from the FishBowl, Fisher calls on his experience as a business executive and technology investor to lend his advice to entrepreneurs in the Silicon Prairie. (To read Fisher’s bio, including a listing of companies he has been involved with, visit treetopventures.com.)
Contact Fisher at fish@treetopventures.com.
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Revenue Committee Chairwoman Abbie Cornett of Bellevue introduced the Angel Investment Tax Credit Act earlier this year at the request of Gov. Dave Heineman. Photo courtesy of NebraskaLegislature.gov.
This past week, a colleague and I spent time reviewing the various application forms required to qualify for the Angel Tax Credit Program that was approved by the legislature in May of this year. I have to say that I was pleased with the overall clarity of the application process. This will clearly be a piece of legislation that helps our state grow jobs!
Now, having said that, it isn’t a slam dunk to get the process nailed down but after spending a couple of days sorting and re-reading the guidelines, I think we got it.
The key to the program is the business that is being submitted for approval. Qualified small businesses are those based in Nebraska with 25 or fewer employees at the time of investment and with at least 51% of the employees working in Nebraska. In addition, the company must be engaged as its primary business activity in proprietary technology to include information technology, renewable energy and a host of others. The company applies and provides certification information to include payroll registers and also uses a federal electronic verification program to ensure that employees are legally able to work in the US. Lastly, they provide a resolution evidencing the authority of the CEO or other authorized signer for the business to apply for and execute the required documents. (You are required to study a lengthy document and pass a test in order to use E-verify but most of the CEO’s that run the companies I invest in are above-average in intelligence so I like our chances. Remember, I said most!)
This kicks off the process; getting the company qualified in the eyes of the state. After that, it is a little bit of a footrace to get in line to get monies from the program. (Caution: getting there is important but following the rules is probably more important.)
Next, it is necessary to get the investor qualified in the eyes of the program. The first allocation of monies is for calendar year 2011 and companies that apply now are getting in the queue for these monies. For the most part, you become qualified as an investor by the state and then make your investment within 90 days; however, and this part I really like, accredited investors are allowed to invest and then qualify within 30 days of the investment. Accredited investors are those who qualify per 501 of Regulation D of the Securities Act of 1933. I like this part because I believe that all angel investors should be accredited and typically advise founders to stay away from investors who aren’t accredited for obvious reasons. (I also would advise non-accredited investors not to invest in startups).
Even though the tax credits are going to be allocated starting September 1, the monies are for investments for the 2011 calendar year. Then, starting the first of December, 2011, any paperwork submitted for 2011 Calendar year investments that were not served (in other words, the limit of tax credits was used up before they got to you) will be automatically held and deemed submitted for the 2012 tax credit monies. Nice job; this is the right way to do it.
Ok … first get the business qualified (unless you are an accredited investor). Then, get the investor qualified (a Nebraska resident who owns less than 50 percent of the company and receives less than 49 percent of their income from the qualified business … more on this second rule later).
After that, the Qualified Business submits paperwork to the state documenting the investment made by the investors (accredited or not) and the investor applies for an allocation of tax credits for the calendar year. The first allocation of tax credits begins September 1 for investments in calendar year 2011 that meet the other qualifications. If you aren’t able to get in that queue, you still want to apply, and as I said earlier, you will be put in the queue for next year.
There are other rules and guidelines to follow; a good study of the 22 page program guidelines is recommended.
Places for Improvements
It wouldn’t be fair to provide feedback on what I feel is an excellent program without also providing some input on where I think there needs to be changes/modifications to improve the program. I am not sure how this problem that I am about to point out gets solved; however, I think it must be solved and I am confident the people who administer the program will figure it out.
For the most part, we (angel investors) look for our founders to have their “skin in the game.” If they aren’t willing to invest their monies, then why should we? When founders invest, this is the best money you can get in the company. Today, because the founders are full time in the business (you want that!) and get most if not all of their income from the salary they get from the business, they are excluded (current rules exclude someone who gets more than 49 percent of their income from the qualified business)! Maybe the rule gets modified so that they qualify if they don’t receive any more than 20 percent of the total payroll of the business; this would mean that the company is paying others besides them. I haven’t studied the various ways this could be accomplished; however, I think it can be done and I encourage those in charge to strongly consider this change.
I would also encourage those in charge to make it retroactive to the start of this program; it is that important to getting the right incentives for entrepreneurs to create startups which create jobs. Without this change, the program somewhat encourages the founder not to invest along with the angel investors and this is problematic for companies trying to raise money and grow. It would be a shame to have such a wonderful program that created this sort of disconnect between the major players (i.e. founders and funders).
Once again, this is a great program and is one of the key tenets of a successful startup jobs program in key technologies which will help change our state. Speaking just for my group, we appreciate it. My hat is off to Senator Abbie Cornett and all the others who worked to create this awesome program.
Nice job!
