North Carolina Gov. Beverly Perdue’s support for a “Founder’s Credit” is generating a lot of buzz among entrepreneurs and investors who have long lobbied for tax incentives that would encourage the launching of new companies and investments in them.
Details of what Perdue has in mind are expected to be included in her budget proposal next week. In a press release, the governor’s office made this reference to the potential tax break:
“Founder’s Credit: Establish a Founder’s Credit, which will exclude initial stock investments in certain North Carolina start-up companies from capital gains. This will encourage innovation and entrepreneurship.”
Richard Holcomb, a founder of several high-tech ventures and currently chief executive officer at RTP-based StrikeIron, is a longtime critic of North Carolina tax policy. He has experienced that first hand, selling two ventures.
“North Carolina’s current treatment of founders stock gains as ordinary income encourages most successful entrepreneurs to leave the state when they have an exit from their company,” Holcomb told Local Tech Wire.
“As more than one successful entrepreneur has said to me after selling his/her company ‘I can stay in N.C. and pay over $1 million in state income taxes or I can move to Florida and use that $1 million to buy a house.’
“They all still live in Florida. It’s a pretty easy choice for most folks.”
David Jones, a partner at venture capital firm Southern Capitol Ventures, said a “founders” credit would stimulate growth.
“We feel this would be a great step towards continuing to spur entrepreneurial companies and investment in N.C.,” Jones explained.
“This Founder’s Credit would essentially encourage more entrepreneurs and seed/early stage investors into the market as neither would be taxed on any long-term value creation,” he added. “The devil is always in the details with this type of proposed bill, so we’ll see how it develops, but on the surface it would be a great step for N.C.”
Sam Taylor, president of the North Carolina Biotechnology Information Organization, likes what has heard so far from Perdue. NCBIO to the governor.
"The [Founder’s] Credit encourages both founders and the early stage investors that work with them to take the risks necessary to launch new businesses that are based on new technologies or other innovations,” Taylor said. “Capitalization of these earliest-stage companies has long been one of North Carolina’s most difficult entrepreneurial challenges. The Credit is aimed squarely at this issue and will help generate deal flow for later stage venture investors and, ultimately, for new products and new jobs."
Entrepreneurs believe a credit would be “helpful,” said Joan Seifert Rose, president of the Council for Entrepreneurial Development, which is one of the largest such groups in the United States.
“This is something many members have expressed an interest in,” she said.
N.C. Technology Association CEO Brooks Raiford echoed Rose’s remarks. NCTA members toured the General Assembly earlier this week to tout the importance of technology to the state’s economy but were warned that tax cuts or incentives would be difficult to manage in a state budget that could run in the red as much as $3 billion.
“Yes, we are supportive – in fact it is a specific item on our legislative agenda,” Raiford said of the Founder’s Credit . Representative Ty Harrell introduced a bill along these lines last year that NCTA supported.
{[The] basic reason is that it serves as an incentive to invest in start-up companies in North Carolina, which fuels business and job growth. Simple as that.”
Bill Warner, an angel investor and entrepreneur in the Triangle, hailed Perdue’s support.
“Yes, it would be good news for founding entrepreneurs and for angel investors,” Warner said. “It would give founders of companies a little bit more incentive and ultimate reward upon liquidating their shares, and it would be an attractive incentive for investors who would get preferential capital gains treatment upon liquidation of their shares.”
If North Carolina chooses not to endorse such a credit, the state will continue to pay a price in exiting entrepreneurs if no changes are made, according to Holcomb.
“The current treatment of founders gains ‘encourages’ most successful entrepreneurs to move to other states with no tax on founders stock,” he explained. “N.C. not only loses the tax dollars it hopes to collect from these people, but it also loses those entrepreneurs who will start their next company in Florida or Texas and not North Carolina.”
Jones, the venture capitalist, said entrepreneurs face numerous taxing challenges that are harmful to starting new ventures.
“Right now founders are faced with the potential of significant capital gains upon sale of their company and as a result may decide to change their state of domicile to a tax free state or at minimum spend countless time and money with accountants and financial advisors to minimize this capital gains tax,” he said.
“Two tools currently used by companies and investors are the current N.C. Qualified Business Tax Credit and the IRS 83b Election. The N.C. Business Tax Credit does not apply to the founders or persons operating in the company, and the IRS 83-b election essentially allows founders to pay the tax on restricted stock at today’s value and it then grows tax free.
“The proposed legislation would certainly spur more high-growth startups in N.C. and perhaps be a good start to help rebuild the angel community and entice more investment at the early stages of company development,” he added. “If passed, this would continue to support it being one of the best times to start a company in N.C. The one potential downside could be that it might lead investors and entrepreneurs into more short-term thinking, i.e. buy and flip instead of staying focused on building a long-term sustainable company.”
