Details on Amendments to the Minnesota Angel Tax Credit

Regular readers of entreVIEW are no doubt aware that the Minnesota Angel Tax Credit, a frequent topic of interest here, ran out of funds a few weeks ago. The $12.2 million available for issuance had been used up by early March, as predicted in a prior post.  

You’re probably aware that Governor Dayton just signed a tax relief bill passed by the legislature last week. I’d like to think that the reason for bipartisan action on tax relief so early in the session is because of all the contacts made by entreVIEW readers who were encouraged by my prior post to contact their legislators to support the Angel Tax Credit. (I’m sure it didn’t have anything to do with political wrangling in an election year.)

The good news, as you may know if you’ve been reading the Business Journal, is that, buried in the tax relief measure’s 50-plus pages, an additional $3 million of Angel Tax Credit funding was allocated for this year. According to the article, the Minnesota Department of Economic Development will begin accepting applications for this year’s additional funds on March 31st, and expects to have all funds allocated by May 11th.  Obviously, this won’t fully satisfy the demand for this year, but it may help those who just missed the funding cutoff earlier this year. 

Also, the legislation extends the angel tax credit program through 2016, with $15 million in credits available for each of 2015 and 2016. If the past is any guide, this amount is likely to be far less than the demand (as $15 million in total credits will probably be allocated this year by mid-May), but it is better than nothing and is evidence that the legislature is beginning to view the angel tax credit as an important factor for Minnesota start-ups trying to raise capital.

There were other changes made to the Angel Tax Credit in the new law, a few of them notable:

• Of the $15 million allocation in 2015 and 2016, $7,500,000 will be reserved (until October 1 of each year) for allocation to qualified greater Minnesota, minority, or women-owned businesses.

• An investor who is an officer or principal of the qualified business or who owns or controls 20% or more of the voting power or shares of such business will no longer be eligible for credit on investments made in that business.

• The three-year holding period for investments won’t apply to a qualified investor who dies before the end of the three-year period.

Fortunately I haven’t had any clients or contacts who would have benefitted from the third bullet above, but I do know several who would have been impacted by the first two bullets.

I’m glad to see the program survive because it has helped facilitate the raising of angel capital. We’ll have to wait and see how these other modifications affect the program over the next couple of years.

Given past activity, more posts on the Angel Tax Credit this year are inevitable. We can only hope the weather will warm up before we’ve got something more to write…. 

HOW MUCH ARE YOU WILLING TO PAY FOR PRIVACY?

How much are you willing to pay for personal privacy? 50₵ off a McDonald’s hamburger? 20% off groceries? Participation in the $1 Billion NCAA Tournament Bracket Challenge?

As users of Facebook, we exchange our personal details in order to connect with anyone and everyone. We sell our privacy to the supermarket when we allow loyalty programs to track purchases and reward us with frozen vegetables and gasoline discounts. We relinquish our privacy to airlines when we download their app to our smartphone to get more efficient service and better information. We disclose personal financial information to Quicken for a chance to win $1 billion in a NCAA basketball pool.  

While we have become used to the idea of giving up a certain amount of privacy in exchange for a service or discount do we really understand what that means? How much does our personal privacy mean to us?

Earlier this month, the issues surrounding data privacy and security were discussed and debated at the Global Privacy Summit in Washington DC, sponsored by the International Association of Privacy Professionals (IAPP). [My prior post on becoming a certified privacy professional through the IAPP can be found here].  The three days at the Summit were filled with topnotch sessions covering a variety of privacy issues, including a particularly compelling talk by Julia Angwin about the cost of personal privacy. 

Following are some highlights of the Summit:

1.  The Cost of Privacy: Julia Angwin described how she spent $2,200 and countless hours trying to reclaim her privacy.

Ms. Angwin stopped using google and gmail. No longer was she going to have her gmail scanned with selected information offered to advertisers. She unfriended her friends on Facebook, started using DuckDuck Go, a privacy protecting search engine, purchased the OFF Pocket, a cellphone case that blocks signals to and from the phone, subscribed to Trusted ID – a company that promised to opt her out from large data brokers, added a privacy filter to shield her laptop screen from voyeurs in the coffee shop, and purchased other privacy related services. Her efforts and the price paid for enhanced privacy are detailed in her recent New York Times editorial, Has Privacy Become a Luxury Good? She analogized privacy to organic food. Consumers may now be willing to pay a premium for privacy and businesses would be wise to jump into this market for privacy sensitive products and services. Her book, Dragnet Nation: a Quest for Privacy, Security, and Freedom in a World of Relentless Surveillance, was also released at the Summit. 

2.  FTC Activity: Edith Ramirez, FTC Chairwoman, discussed FTC plans for the development of guidelines for data de-identification, the upcoming release of a FTC report on data brokers, and the need for new federal data security legislation. She supports stronger rulemaking authority and enforcement capabilities for the FTC relative to data security with more FTC efforts to come in mobile location tracking issues. 

Ramirez also appeared with officials from the U.S Department of Commerce, Canada, and the European Union to announce efforts to help businesses ensure compliance with global data privacy rules. This was clearly in response to EU criticism of the Safe Harbor approach that has allowed US businesses to self certify compliance with EU privacy regulations. Ms. Ramirez pointed out that the FTC has recently brought 13 actions under the Safe Harbor.

3. EU Data Protection: Data protection regulators from the UK, France, and the Netherlands discussed the intense debate going on in the EU over the potential overhaul of the entire data protection regime. One of the key elements of the overhaul is a “one stop shop” approach that would allow multinational companies to deal with one data protection regulator rather than multiple regulators in each member state. 

4. Privacy at the NSA Rebecca Richards, the newly appointed and first ever Civil Liberties and Privacy Officer (CLPO) at the National Security Agency (NSA), made her first public appearance at the Summit. Her job is to provide expert advice to the Director of the NSA and oversight of NSA’s civil liberties and privacy related activities. Her appointment was one of the reforms specifically called upon by President Obama. Ms. Richards identified the enormous challenge she faces of being the voice of privacy and supporting an agency with national security issues at stake.  

5. Digital Medicine: George Savage, the Chief Medical Officer of Proteus Digital Health, demonstrated his latest innovation- an ingestible smart micro sensor. The size of a grain of sand, the sensor is co-formulated with a pharmaceutical product.  When swallowed, it emits a signal like a digital heartbeat that is detected by band-aid like patch monitor worn by the patient. The patch tracks the heart rate, sleep pattern, and other activities of the patient. Dr. Savage ingested the micro-sensor and as he spoke we watched as the data was transmitted in real time through his smartphone to a colorful display on a television screen. While this tracking capability holds enormous potential benefits for healthcare research and medical treatment it also raises significant privacy issues.

So how much do we value privacy? Can the free market save us and give us choices that protect our personal information and privacy? Will government step in with more regulations? Will we follow the European model and make personal privacy a human right?

Stay tuned as the discussion and debate promises to become even more amplified and interesting. 

And, watch out for the drones!

Phillip Seymour Hoffman’s Last Wishes—I Want My Son to be Raised as a New Yorker

Phillip Seymour Hoffman’s life tragically ended far too soon for movie fans, and I’m sure for his three children as well.  His will left his reported $35.0 million fortune to his long-time girlfriend, and if she did not survive him or disclaimed any amount, to his 10 year-old son, Cooper. The couple had another two children after Cooper, but they were not specifically mentioned in the will since it was prepared shortly after Cooper was born and never updated.  Even though his lack of planning—and likely large tax bill (over $15.0 million)—are both very interesting, it is Cooper’s trust and directions regarding is upbringing that warrant this blog post.

Hoffman’s will specifically leaves instructions for where Cooper should live.  Cooper’s trust will own Hoffman’s New York apartment, and provides for Cooper to live there. Later in the document, when discussing a guardian for Cooper, Hoffman states:

“it is my strong desire…that my son, COOPER HOFFMAN, be raised and reside in or near the borough of Manhattan in the State of New York, or Chicago, Illinois, or San Francisco, California, and if my guardian cannot reside in those cities, then it is my strong desire, and not direction, that my son, COOPER HOFFMAN, visit these cities at least twice per year throughout such guardianship. The purpose of this request is so that my son will be exposed to the culture, arts, and architecture that such cities offer.”

Such provisions of direction are not necessarily legally enforceable, but they can be persuasive to the recipient and, in some cases, a court.  

I have assisted clients in giving such informal direction (essentially, making known their “hopes and desires”) when it comes to the management of assets or the raising of children, but not necessarily in this way.    Often clients include provisions like this when they want the trustees to hold on to a specific asset (so as, for example, to enable the children to continue to use a family vacation home), and I have even had clients spell out appropriate school districts for their children in a separate letter to a guardian.

This provision is interesting mostly because Phillip Seymour Hoffman crafted it, but it is also a reminder about what belongs in and out of a will.  This will was written ten years ago, and he may feel dramatically different today.  Further, this direction is very specific, making compliance potentially difficult for both the guardian and Cooper.  Hoffman lived in New York and owned an apartment there, but seemed to have no connections or real estate in either Chicago or San Francisco.

If you have specific hopes for your children or the assets they will inherit, you can certainly prepare something that accompanies your estate plan and gives guidance to trustees and guardians.  These writings can be very helpful to those who manage your assets or raise your children.  However, be careful with where you include this language of direction, and revisit it often as your personal and financial life changes.

“Private Equity and Angel Investment”

As a new author to entreVIEW, I wanted to write about a topic near and dear to the hearts (and pocketbooks) of entrepreneurs—money! While private capital raising remains tough, there has been a shift to alternative asset classes and the “private equity” landscape has been robust.  

Depending on the type of business and on the amount of money needed to begin or continue operations, equity financing may be the only capital available for your start-up. However, it doesn’t hurt to know and understand a little about private equity funds, which could be a source of later stage capital or an exit. What follows is a summary of what we mean by private equity. 

Simply put, a private equity fund is a collective investment vehicle used for making equity or debt investments. Some common attributes: 

• Usually structured as Delaware limited partnerships. Under this framework, the fund is not subject to taxation on its income or gains but limited partners (“LPs”) are taxed based upon their share of the fund’s profits or losses.

• Managed by a general partner (“GP”) with capital raised from institutional investors, universities, insurance companies, foundations, endowments or high net-worth individuals. 

• Key economic incentives for the GP are the management fees and the carried interest, which is a share of the profits of the fund’s investments (typically 20%), usually with some minimum rate of return (typically 8-12%) before the GP shares in the success.  

• The key economic incentive for an LP is the opportunity to earn a high rate of return on their invested capital through access to a diverse portfolio of investments that are made by experts. 

As with so many things, there are a host of regulations that apply to these funds, including the Investment Company Act of 1940 and possible registration under the Securities Act of 1933, if there isn’t an available exemption like Regulation D, which is often available in offerings to accredited investors.

Investing in private equity funds allows groups of sophisticated investors to pool their resources to mitigate the customary risks associated with investing while attempting to maximize the synergy created by the collective “thought equity” of the LPs. These investors are known as “angel investors.” Angel investors are accredited investors who invest in businesses in exchange for convertible debt or an ownership stake in the business. These individuals or institutional investors conduct their own due diligence and make their own determinations about individual investments (like the “Sharks” on “Shark Tank,” without millions of people watching).  Like “Shark Tank,” angel investors will often make investment decisions based upon a personal interest in the business or the entrepreneur. 

Of course, nobody should take money from angel investors without their eyes wide open about the potential perils. Alignment of interests between the entrepreneur and the angel is critical (e.g., what type of exit in what timeframe?). For this reason, remember that raising angel capital can be like getting married. Make sure that each side has done their due diligence so their eyes are wide open to problems (like whether to leave the toilet seat up) and defined their rights and obligations (sort of like a pre-nuptial agreement) to ensure that everyone is on the same page. At the risk of sounding self-serving, getting your lawyer involved early in the dialogue is a good idea.

Taking on the right angel investors can actually have many positives in addition to securing capital needed to build your business. The ideal angel investor will be someone who has experienced success before (and has not just been born with a Silver Spoon) and who brings contacts and relevant expertise. With interests aligned between investor and entrepreneur, all parties should have the incentive to see the business succeed.

The Games HR is Playing

Let’s face it. The HR department isn’t typically filled with the go-to techies in your office. Usually HR lags more than a bit behind the curve on technology adoption – primarily because HR isn’t usually a profit center so acquiring new technology can be an uphill battle from the get-go. But there’s some really, really cool stuff happening in HR tech.  My favorite is gamification.

Gamification is starting to pop up everywhere in HR, and that should be no surprise. With everyone from my 6-year-old to his grandma playing Angry Birds or Candy Crush, new and established companies are finding gaming as a way to transfer detailed information to a wide variety of employees. By using a game, companies can engage employees and potential applicants in something fun and educational. Just like Where in the World is Carmen Sandiego? (and its catchy theme song by Rockapella) taught me geography.

How about using a game like Farmville to attract your next Restaurant Manager? Marriott Hotels did just that.  By placing a game on their Facebook careers page permitting potential applicants to test their restaurant managing skills – complete with purchasing ovens, hiring chefs, and selecting produce – Marriott engaged thousands of potential applicants before they even submitted an application. Plus, applicants could self-evaluate whether they’d even be good at the job. (I’m awful and should not apply.) 

But gamification isn’t just coming from big companies, entrepreneurs are developing games too. Imagine training folks on ever-changing and complex concepts using a video game. Cool, right? That is exactly what VitalSims is doing – using video game simulations to teach doctors and nurses how to treat the chronic disease of diabetes. Because diabetes treatments are evolving, training care givers can be tricky. With gaming, the sometimes tedious task of reading scientific journals can be supplemented with gaming simulations providing richer and more meaningful training. By partnering with HealthPartners and the University of Minnesota, VitalSims has developed their gaming simulations to be as up-to-date as possible so patients receive the best possible care.

If you think gamification will only work on your young, male employees, think again. Video gamers are much different than you think. The demographics are astounding: 45% of gamers are female and 68% of gamers are over 18. In fact, almost twice as many females play than teenaged boys. Female gamers are not mythical creatures!  While not everyone may be tracking down drug dealers in Grand Theft Auto V, you may hear your HR department advocating for some gaming soon.

A Post by Kate Bischoff, Guest Blogger

What: Laura Hillenbrand, Unbroken: A World War II Story of Survival, Resilience, and Redemption (New York: Random House, 2010)

Why: A case study in the strength of the human will in the face of unimaginably horrible circumstances.

I know some entrepreneurs. I know that it’s not an easy life. For every exhilarating victory, there may be countless agonizing setbacks, enough to make a person downright gloomy. But there is one characteristic shared by successful entrepreneurs that protects them from—or perhaps blinds them to—the downsides, a quality that keeps them going when the going is tough. That quality is perseverance.

Laura Hillenbrand’s Unbroken is not, by any stretch of the imagination, about business.  It’s not about products, markets, or money. It isn’t about achieving goals, unless you count just staying alive under unimaginably horrible circumstances to be a goal. It is, however, about perseverance, about doing what you need to do to get where you want to be.

This book was Time Magazine’s Best Nonfiction Book of the Year for 2010, and for good reason. In a nutshell, an Olympic runner joins the army air corps in 1941, crashes while on a rescue mission, is lost at sea for over a month, is captured by the Japanese, is beaten savagely and repeatedly while in captivity, and returns home at the end of the war to a raging case of PTSD, which he overcomes to lead a long and productive life.  He is, in fact, still alive, and at age 97 is working with his close friend Angelina Jolie to film his story.

If you’ve hit a bad patch, maybe this book will help put things in perspective.