I wrote a Forbes column before the elections called Stimulus Package For Entrepreneurs. As we have started discussing bootstrapping as a weapon for mass reconstruction, we should also revisit the tax policy and stimulus issues. Here are the nuggets.
My very strong recommendation to entrepreneurs is to learn the tricks of bootstrapped entrepreneurship so that they can keep maximum control over their destiny. This recommendation assumes that entrepreneurs would be putting their savings into their ventures. Thus, we need a tax policy that makes it as attractive as possible for entrepreneurs to “invest” in their own ventures, especially at the early stages.
For example, an aspiring entrepreneur ought to be allowed to create a tax-free pool of income for use as personal venture capital. Such a pool of capital would go a long way to help kick-start new ventures.
The next constituency is angel investors. These days, traditional venture capitalists hardly participate in early stage investments. The bulk of the responsibility of early stage investment is shouldered by angels, who are usually not the Bill Gates and Warren Buffetts of the world. More often than not, an angel turns out to be the entrepreneur’s uncle, who is a doctor making $400,000 a year and can afford to invest in the nephew’s audacious dream and unproven idea.
The misconception that the angels are the very rich people worth hundreds of millions leads people to think that these guys would invest anyway, tax or not. But most entrepreneurs–especially first-time entrepreneurs–don’t have access to such high net-worth people.
Thus, the government should be very careful how these $400,000-a-year uncles are treated from a tax policy point of view. The choice may well be between $250,000 being invested in a start-up, versus that $250,000 going into the government’s pocket as income tax.
Angels should also be allowed to create pools of tax-free capital for investing in start-ups–especially in unknown, unproven entrepreneurs who often don’t have access to venture capital. It is not so different from a tax-free account set aside for a child’s education. It is also similar to allocating money to “foundations” to fund nonprofit “causes.”