Stimulus for Startups: Some Thoughts From a Seattle Startup Attorney

When Congress returns, it is going to be pondering what it can do to stimulate the economy. It will have limited time before it recesses again to campaign. In fact, only about 3 weeks after it comes back into session on September 13th for the Senate and September 14th for the House. A very short period of time.

I’ve already written that I think that investors in companies ought to be able to obtain a full and immediate nonrefundable tax credit for the entire amount of their investment to the extent that the funds are used to employ people. This would cost the Treasury (because, for example, an investor’s tax bill would be reduced by the amount of a $100,000 investment by $100,000, and the payroll and income taxes collected on $100,000 paid in wages would be less than $100,000), but I think it would be a simple and wonderful way to encourage direct investments into companies and create jobs (and the cost to the Treasury would probably be less than the last stimulus cost per job and the jobs created would be private sector jobs). I think it would be the equivalent of a “moon shot.” It would be a dramatic, not small, attempt to tackle a very large problem–our unemployment rate.

But the point of this post is not to talk about tax policy, but to talk about how Congress can make life easier for startups. This is an important matter of public policy, especially as it relates to jobs. As written about by Jeff Bussgang in his great article, Who Will Champion Entrepreneurship?:

The Kauffman Foundation did a comprehensive study of historical job creation and, not surprisingly, found that small businesses are the main source. “Without startups,” writes Senior Fellow Tim Kane, there would be no net job growth in the US economy. This fact is true on average, but also true for all but seven years for which the US has data going back to 1977.”

I have some suggestions for “championing” entrepreneurship as well. These are based on what I see as impediments to startups from a legal perspective. Despite being a lawyer (or maybe because I’m a lawyer), I don’t like complex laws that make the legal lives of companies more difficult. Laws ought to be short, simple, and easy to understand. We don’t need or want 2,000 page bills. The KISS principle applies to law making as well as lawyers. Here are my suggestions on how to make the lives of entrepreneurs easier from a legal perspective:

  1. Repeal Section 413 of Dodd-Frank Act. This is the provision which makes it harder to qualify as an accredited investor. I am not sure why we need to make it harder to qualify to invest in startups. It would seem to me that encouraging and allowing investments in startups ought to be a national priority.
  2. Reduce the threshold for qualifying as an accredited investor. Again, the point here is–startups create jobs, but to create them they need capital. Let’s reduce the financial thresholds to invest in startups considerably (or, think “moon shot”–repeal them entirely).
  3. Repeal state securities law filing requirements. Why allow states to charge startups a filing fee for filing forms incident to fundraising? This just takes money out of the hands of startups that they could use to employ people or on product development.
  4. Allow startups to advertise for funds. In other words, repeal the prohibition on general solicitation. This rule might have made sense in a time before the Internet. Now, with such widespread availability of information, I am not so sure the rule is appropriate anymore. In any event, the rule makes it more difficult for startups to raise capital. Congress, let’s make it easier for startups to raise capital. Again, think “moon shot.” Not the same old tired and old things we have tried in the past to stimulate the economy. Let’s try new things. New things that will make the world more exciting.
  5. Repeal Section 9006 of the Patient Protection and Affordable Care Act (the health care reform bill). This is the provision which requires persons in business to issue Forms 1099 to anyone they buy more than $600 in goods from every year. Starting January 1, 2012, if you are in business and buy a PC from Costco for more than $600, you are going to have to issue a Form 1099 to Costco. This is a ridiculous and absurd rule.
  6. Repeal Section 409A of the Internal Revenue Code as it applies to small companies. Section 409A is a waste of time and money for startups, and costs precious dollars that they would otherwise use to employ people or further develop their product and service offerings. Let’s repeal this rule. It is very simple. Just repeal it.
  7. Reverse the presumption on Section 83(b) elections. In other words, revise the rule so that if it is in the taxpayer’s best interests that the election be filed it is deemed filed, and require it be filed only if the taxpayer wants to opt out of being taxed on receipt of restricted property. The way this rule works now, it is just a trap for the unwary. There are many of these in the Internal Revenue Code, and they all ought to be stripped out.
  8. Set the information reporting requirement in Section 6041 of the Internal Revenue Code to adjust for inflation since the date of its enactment. In other words, increase the $600 threshold for 1099s to what would now be around $3650, according to the Congressional Research Service.

 I am sure there are many people in the startup community who have more and better ideas of how to make lives for startup companies easier and better. Please share! If we don’t talk about our ideas, there is no chance of anyone in Congress supporting them.

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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