If you are raising capital for your tech startup, get certified for the Minnesota Angel Tax Credit as early as possible this year. The Angel Tax Credit is a huge incentive for investors. It helps them manage the risk associated with new ventures, and it may also indicate that your company is a safer bet than an uncertified company.
The Minnesota Angel Tax Credit is an income tax refund equal to 25% of all eligible investments. There is over $12 million per year available to investors for 2011 through 2014, but less than $2.5 million was allocated to 19 companies in 2010, so there is plenty of room for more companies and investors to participate in the Angel Tax Credit program this year.
Applying for the Angel Tax Credit
In order to take advantage of the Minnesota Angel Tax Credit, both the company and the investor must be certified. So start getting your business certified now. To apply for Angel Tax Credit certification, get in touch with your accountant and your lawyer. They will need to put together a board resolution, a capitalization table, a set of financial statements, and your most-recent tax return, unless your company is brand new. You may also want help filling out the application itself.
New startups can submit pro forma financial statements, but ongoing companies must submit financial statements from a public accounting firm. Of course, if the Angel Tax Credit attracts more money for your company, the modest (assuming you have been keeping accurate books yourself) cost of getting financial statements from a CPA should be well worth it.
The financial statements requirement is the main reason why an Angel Tax Credit–certified company is more attractive to investors than an uncertified company: most private startups do not have even rudimentary financial statements or information available. Just knowing you have them is helpful, and the statements can help investors become better-informed, happier investors if you choose to share them.
Once you submit your company’s application, DEED will approve or reject it within 30 days, although it generally happens in a week or two, as long as your application is complete. Assembling the application materials usually takes longer than DEED takes to approve the application itself.
Helping investors get certified for the Angel Tax Credit
Once your company is certified, you need to find investors who are also certified, or else you have to give investors a chance to get certified before they write you a check. Some companies help investors get certified, since certified investors are more likely to invest—or to invest more—with the Minnesota Angel Tax Credit incentive.
The investor application is deceptively simple. The hard part is knowing which box to check for the type of investor. Accredited investors can probably find the right box on their own; you may want help from an attorney to make sure unaccredited investors get the right box checked.
Once the investor submits the application, DEED has up to 30 days to accept or reject it. This is why it is a good idea to get your company certified right away; the entire process will take less time if your company is already certified.
Apply for the Angel Tax Credit before completing the investment
Before the investor writes a check, your company and the investor must jointly apply for allocation of the Minnesota Angel Tax Credit for the investment transaction. Your business—together with your lawyer—can take the lead on this. DEED will approve or reject the application within 15 days, and then the investment can go forward.
Getting your company and investors certified, and then getting the investment approved can take a couple months. That’s why, if you will be raising capital in 2011, you should get your company certified right away.
Sam Glover is a Minneapolis business lawyer for geeks. He also edits the law firm marketing and practice blog Lawyerist, Lawyerist, and Caveat Emptor, a consumer law blog, and speaks frequently on law practice and lawyering.