The angel investor tax credit, which was signed into law in January, is open both to the wealthy individuals who bankroll risky startups and the venture capital firms that may take multimillion-dollar equity stakes in more-seasoned ventures. The tax credit will be for 10 percent of the investment, up to a maximum of $500,000; a $5 million investment would generate a maximum $500,000 credit.
Angel investor Mario Casabona is a member of JumpStart, the angel network of the New Jersey Technology Council. He said the early-stage investment community lobbied for several years to get the tax credit, which he said will help ease the high risk of funding startups, less than 10 percent of which yield big profits.
When Gov. Chris Christie signed the angel tax credit into law Jan. 31, it was a sign that "the early-stage community is getting attention from the governor's office," Casabona said.
Total credits under the program are capped at $25 million a year, which could yield $250 million in investment dollars. The credits are "refundable," which means the state will pay cash for credits that exceed the individual or the company's New Jersey tax liability. For example, if $10,000 in taxes is owed to the state, but the individual or business qualifies for a $500,000 credit, the state will both offset the $10,000 taxes and write a check for $490,000.
Ventures with up to 225 employees qualify, prompting several experts to voice concerns that early-stage startups with a handful of employees will get crowded out by larger firms.
That's a concern for Jay Trien, president of the Venture Association of New Jersey, a networking group for entrepreneurs and investors. Still, "this is a great thing," he said. "Anything that incentivizes angel and early-stage (investors) to support New Jersey-based companies is terrific."
Attorney Edward A. Sturchio Jr., of Day Pitney, said the angel tax credit "does not operate in a vacuum. When you examine the (Christie) administration's and the Legislature's efforts to make New Jersey a state where biotech and emerging tech companies want to domicile, it is clear that there is a significant effort under way to do just that." Among those efforts, he said, are revisions of state law governing LLCs and a bill passed by the Legislature earlier this month that "streamlines and simplifies outdated and confusing portions of New Jersey corporate business law."
CPA John Genz, of the accounting and consulting firm EisnerAmper, said the angel tax credit "is a very broad program — they really expanded the types of businesses that can be included," compared with the High Technology Business Investment tax credit, which expired at the end of 2001. That only covered corporation taxes; the new angel credit applies to both New Jersey individual income taxes and corporation taxes. The original program covered a half-dozen high-tech sectors, while the angel credit is expanded to cover fields like motion picture/video production, smartphones, tablet computers and motor vehicle electronics.
"I think the money is going to go pretty quickly," Genz said.
In 2007 engineer Donald Doane co-founded Wayne-based ConnectYard, an angel-funded social media platform used by college professors to communicate with students. His 70 customers include his alma mater, Cornell University, and the New Jersey Institute of Technology. In 2010, the company raised $1.2 million from several JumpStart angels.
Doane said the angel tax credit "is going to create growth opportunities for young companies. It gives investors an added incentive, especially in the angel round, which is the highest-risk money. This is absolutely needed."
Casabona knows all about the high risks. Since he became an angel investor in 2007, "I've had one successful exit — which paid back all my other investments," he said. He had invested alongside fellow JumpStart angels in Virginia-based RaySat, a satellite communications company acquired three years ago by a private equity firm. The angels got between four and five times their return on the investment in RaySat, he said.
John Frei is chief executive of three-year-old SpeechTrans, a language translation software company based at the Meadowlands Regional Accelerator, an incubator at Bergen Community College, in Lyndhurst. SpeechTrans received a $270,000 JumpStart angel investment.
"Angel money was critical for us," he said. Along with the money, two JumpStart members joined his board, and "have been really great about giving us guidance and direction."
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