While there are vaccines on the horizon and a potential further stimulus package, possibly in time for the holiday season, we still have a ways to go until economic recovery. Startups will be key to that recovery.
Which Startups Will Succeed?
Have you ever wondered if your app idea was worth pursuing, if a startup was worth working for, or if your buddy’s startup was worth investing in? Of course you have. While enterprise SaaS startups have reliable benchmarks to compare against, early-stage consumer app startups are harder to evaluate.
This is a problem for these startups, because it affects their ability to raise money. It’s also a problem for Midwest investors, who miss out on huge successes like Groupon and Grubhub.
MN Entrepreneur Gift Guide
As of 2010 census data, roughly 49% of the private sector worked for a small business, and 2 out of 3 new jobs were created by a small business. If you didn’t find all of your gifts on Black Friday, Small Business Saturday, or Cyber Monday, check out our 2020 Minnesota Entrepreneur Gift Buying Guide and buy from a small business.
It includes ideas for a variety of products from local companies from camel milk skincare products to Boozy Jerky, and from Askov Finlayson’s Climate Positive Parka to the James Beard-winning “Sioux Chef’s Indigenous Kitchen” (in case you’re still celebrating Native American Heritage Month).
Local Early-Stage Startup News
LaunchMN celebrated it’s one-year anniversary, and released a First-Year Progress Report.
Our latest Lean Startup School (with Red Wing Ignite, ILT Studios, and LaunchMN) pitch night ended with 2 winners:
- 1st Place: Scobium – They have a new eco-friendly synthetic leather material for the textiles industry, manufactured using bacterial cellulose.
- 2nd Place: TalentSignal – They are a pre-launch startup researching a new business model to help guide students through the development skills needed to land a job in their chosen field by matchmaking them to successful practitioners who serve as mentors.
gBETAGreaterMN St. Cloud Director Precious Drew was just named to Minne Inno’s 2020 Under 25! (Boozy Jerky mentioned above is an alumnus!)
Startup Investment Incentive
If you’re thinking of investing but need some incentive, here is how investors (including investors in VC funds and angel investors) can get a 100% exclusion on their gains from those startup investments.
Here is a mix of upcoming events, for investors, founders, and/or ecosystem supporters. All events listed are virtual.
- Dec. 1-3rd, Rise of the Rest Virtual Tour: Equity Edition. Black-founded startups based off the coasts compete for $2M in funding. Days 1 + 2 feature town halls: “Building Inclusive Startup Ecosystems” and “Entrepreneurship and HBCUs”. Day 3 is the Pitch Competition Finals.
- Dec. 2-4th, Web Summit From the folks who produce Collision, this is the annual European version.
- Dec. 2-4th, Powering Inclusion Annual Summit. This is the Center for Economic Inclusion’s Annual Event. Virtual this year, “The Summit is for leaders at every stage of the journey of building racially inclusive organizations, communities, and economies”.
- Dec. 3-10th, Food | Ag | Ideas Week. Put on by MN-based Grow North, this annual event focuses on ideas to innovate our food system.
- Dec. 3rd, 2020 Chicago Tech Day. Sort of a “State of the City” event for Chicago tech, with Mayor Lightfoot and various tech community leaders.
- Dec. 11th, Walleye Tank Ice Fishing Edition. Startups, pitch your healthcare innovation. Deadline to apply is Dec. 1st.
- Dec. 13-19th, Curiosity Week with Emerging Digital Academy. Based in Fargo, ND, this new tech community gathering wil feature 30+ events.
- January, TBD, Lean Startup School events with ILT Studios:
USA Softball Announces Partnership Agreement with TeamGenius. TeamGenius has a new partnership to serve as the athlete evaluation system for USA Softball.
Inno on Fire: The 30 companies and people shaping Wisconsin’s tech scene. Allergy Amulet was named to the list of impactful tech startups.
2ndKitchen Releases New 2021 Multifamily Amenities Guide. 2ndKitchen has a new report out with research and survey data on the importance of amenities in Multifamily properties.
Great North Labs is hiring VC Analyst interns for summer of 2021. The application closes this week!
Dispatch is hiring a Territory Sales Manager, Business Development Representative, and Ruby Developer for Remote work.
FactoryFix is hiring a Team Lead – Full Stack Developer, Full Stack Developer, and Infrastructure Developer- DevOps in Madison, WI; and a Sales Development Representative in Chicago, IL, Indianapolis, IN, or Madison, WI.
PrintWithMe is hiring a Regional Sales Directors for East Coast, South Central, and South East regions; Director, Demand GenerationOperations Lead, and MBA Strategy Intern in Chicago, IL.
Parallax is hiring an Experienced Product Designer in Edina, MN.
Branch is hiring a Senior Software Engineer and Android Engineer for remote work, and an Account Executive, Mid-Market, and Channel Sales Manager in Minneapolis, MN.
Inhabitr is hiring a Chief Growth Officer/Head of B2C Growth, and a Sales and Customer Experience Associate in Chicago, IL.
Clinician Nexus is hiring a Customer Success Manager in Minneapolis, MN.
NoiseAware is hiring a VP of Marketing, a QA Technician (independent contractor), Account Manager, and a Customer Advocate in Dallas, TX.
PartySlate is hiring a Senior Growth Marketing Manager in Chicago, IL.
Section 1202, or “The Small Business Stock Gains Exclusion”, provides a 100% tax exclusion for Qualified Small Business Stock. If you invest in early-stage companies and aren’t familiar with Section 1202, check in with your tax advisor. Being able to exclude 100% of the gain on a stock sale for cash is virtually unmatched anywhere in the tax code.
Section 1202 was originally part of the Revenue Reconciliation Act of 1993, which aimed to provide relief for investors risking their funds in new ventures and small businesses. It now allows for 100% exclusion of the gains on Qualified Small Business Stock (QSBS), capped at the greater of $10M or 10x the investor’s basis.
What Investments Qualify?
Early-stage startup investments can qualify for the exclusion if they:
- are held for five years
- were made after Sept 28th, 2010
- are in a C-Corporation
“Most early-stage tech companies are considered qualified businesses under Section 1202,” according to CliftonLarsonAllen’s Patrick Smith, “but several types of businesses are not.”
According to Smith, excluded business types include:
- Professional services in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services
- Banking, insurance, financing, leasing, investing, or similar businesses
- Farming, mining, or natural resources extraction
- Hospitality (hotels, motels, restaurants, or similar businesses)
What Is Qualified Small Business Stock (QSBS)?
Section 1202 (PDF) defines “QSBS”:
It is stock in a domestic C-Corporation issued after the date of enactment of the Revenue Reconciliation Act of 1993 (August 10, 1993). It must be acquired by the individual taxpayer (or a pass-through entity, but not a corporation) at the original date of issue (not in a secondary offering) in exchange for money, property (excluding stock), or as compensation for services.
The business must:
- have assets <$50 million at the time of the equity issuance and immediately thereafter (including cash received from the issuance)
- be an active business for the duration of the investment
Utilizing the Exclusion
When making investments, investors may want to consider investment groups or funds that have a process to take advantage of the 1202 exclusion.
“QSBS is a very powerful tax benefit that incentivizes private investment into startups,” said Mike Schulte, senior analyst at Great North Labs, “However, there are potential mishaps in structuring and documenting a transaction that can inadvertently ruin compliance. Convertible instruments, entity selection/conversion, and financial reporting are just some of the issues to understand and watch out for. It is important for issuers, investors, and each of their service providers to cooperate to ensure 1202 compliance.”
NOTE: This article is not intended to provide tax advice. Consult your tax accountant or tax attorney.
This post is a distillation of a longer post I published in the Angel Capital Association’s “Angel Insights Blog” here.