SCORE Minnesota

Tax Break for Minnesota Angels

May 25, 2010

Since the recession, many large high tech firms have been hanging onto their cash when they typically acquire and/or invest in high tech start ups. This kind of ultra conservatism, as warranted as it may be, has slowed the growth of new technology businesses. For Minnesota high tech start ups looking for capital, the wait may not be much longer.

Many entrepreneurs look to family and friends for help with start up capital. If that is not an option or is insufficient, they often look for an angel.  The kind of angel an entrepreneur looks for is not dressed in a long white gown with wings, but it does have deep pockets.

Angel investors are affluent individuals who provide funding in exchange for convertible debt or equity. Unlike venture capitalists who invest a portion of a professionally managed fund, angels invest their own assets. Angel money typically bridges the gap between the seed funds invested by the entrepreneur and/or their family and friends. More often, angel money is typically used for second round financing.

According to Joy Lindsay, president and co-founder, StarTec Investments and the chair of the Minnesota High Tech Association Board of Directors, 57,000 companies were funded by angel investors, representing $17.6 billion in capital investments in 2009.  Venture capital invested $17.7 billion but only 2795 companies were funded.

This year, entrepreneurs in Minnesota could have an easier time finding funding for their high tech firms because of a new refundable tax credit for angel investors investing in Minnesota businesses that was passed on April1, 2010. The tax credit encourages job growth and job creation by providing capital investment incentives to small, emerging, high technology businesses in Minnesota.

The state will give qualified investors a 25% income tax credit for investing in high tech firms.  The maximum credit is $125,000 per year per individual or up to $250,000 for those who are married and filing jointly. Program funding is limited to $11 million in 2010 and $12 million for 2011-2014. However, there are specific requirements to qualify for this credit. Details are located on the Department of Employment and Economic Development website.

The tax credit will provide numerous benefits to Minnesota. Businesses will get the capital they need to grow which leads to the creation of new jobs. And, investors will be motivated to invest in new business because their risk is mitigated.  Here are the main objectives and stipulations of the program:

1. Create new long term Minnesota jobs-so the business needs to be headquartered in Minnesota and have mostly Minnesota employees. Every job in the company that receives the investment must pay over 175% of the poverty line, or $18.55 per hour on a 40 hour scale, counting benefits with the exception of board members, officers, or owners of over 20% of the company. Also, the company can’t have received more than $2 million in capital before this round.
2. Develop high technology-so the company must have a proprietary technology protected by patent, copyright or trade secret, etc.  There is a list of specific industries not eligible, including banking, finance, leisure, lobbying, political consulting, ethanol from corn, etc.
3. Limit the amount to be spent by the state each year-so there is an application process for the investor and the company as well as an approval process that can take up to 30 days.
4. No state budget for administration-so there are fees for all involved to fund the processing.
5. Angels must be accredited investors by Federal rules or comply with state rules for qualifying.  Angels can also invest through a fund that is organized as a pass through entity (e.g., S-Corp, LLC, partnership).  Angels must invest at least $10,000 and no company can receive more that $1 million in credit (or a $4 million investment).

Applications are expected to be available this summer. So, entrepreneurs who have been looking for an angel may very well find one this year.  For more information contact Jeff Nelson in the Office of Business Finance at 651-259-7523 or email him at Jeff.M.Nelson@state.mn.us

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Dan Nissen, St. Paul SCORE
View more posts by Dan Nissen

Filed under: Capital,Entrepreneurship,Start-Up,Tax

Tags: angel investors, entrepreneur, high tech start ups, investors, start-up capital, tax credit