Are Hawaii's Tech Tax Credit Worth the Cost?

Comment

Comment by GB Hajim on January 7, 2009 at 8:56pm

Got it. Aiming for huge success.

Comment by John on January 7, 2009 at 6:15pm

Hi GB, I do not think of it as binary. There's a range of outcomes for a startup - from failing ($0 exit) to huge success (Google exit). While most of the exits cluster at or around $0, the results can vary significantly.

When you get more company for less money, the company can do much worse and an investor can still be ok.

For instance, let's say a startup struggles and eventually is sold for only 60% of the capital invested. Normally, investors would take a loss. With 221/215, because they are getting more company for less money, the investor may actually make money even if the company is sold for less than the capital invested. The local investor is profitbale off the tax credits and the mainland investor,via the 2-to-1 mechanism, makes money because they got extra equity via the credit exchange.

Of course, in this all too common scenario, the State eats the cost of the credits and gets no indirect benefits of long term job growth.

Comment by GB Hajim on January 7, 2009 at 5:10pm

More company for less money does not decrease your risk. If the company loses, you still lose your investment. How does the State absorb this risk? If your start up fails, the mainland investor loses everything. If it succeeds, the State along with the investor benefits.

Comment by John on January 7, 2009 at 12:51pm

What I have heard, as we researched this situation, was that most of the money being invested in the 221/215 system was going to companies who DIDN'T care about the long term, and who WERE just set up as tax credits.

Wow - that's scary.

Tom, I am with you and do hope the plan is not dropped or rendered useless. The reality is the program is at significant risk now - especially with the state of the economy. I think it's critical that we offer constructive improvements to make it better.

To GB's point earlier about taking action. I'd be happy to help write letters, go to meetings, etc. I also think the exchanges that we are having on TechHui helps. While maybe a dozen people are commenting, I am sure there are many many more people reading and learning from the exchange. I am certainly benefiting from talking through the issues involved.

Comment by Tom Benson on January 7, 2009 at 12:39pm

I can see the problems for sure. If it's too sweet a deal, then people just play it as a pure tax shelter, and and squeeze money, without actually caring about creating a company.

Again what I have heard, as we researched this situation, was that most of the money being invested in the 221/215 system was going to companies who DIDN'T care about the long term, and who WERE just set up as tax credits. This creates a problem for us, because we would have a hard time getting investors to consider investing with us. They are focused on the concept of a tax shelter, not a business start-up.

So John, I really agree with you. It is not helpful for *me* as a serious entrpreprenuer, when the rules of the game cause investors to favor tax shelters instead of serious start-ups. I would support tweaking the rules in fact it would probably help me quite a bit of the rules were tweaked. I just hope that the whole plan isn't dropped or is chopped so severely that it no longer has any value.

Comment by Daniel Leuck on January 7, 2009 at 10:59am

Often, if not generally, those out of state investors are getting higher equity stakes than the market value of their investment. This is the whole 2 for 1 transfer issues. Mainland investors trade their credits to local investors for higher equity stakes.

True, but that was by design. The reason for allowing the grant of tax credits from outside investors to local investors in exchange for larger equity stakes is to a) encourage outside investment in Hawaii and b) encourage experienced mainland tech investors to come in on deals with less experienced local investors and raise the bar in terms of finding the best companies, asking the right questions, etc. I'm not commenting on whether or not this has worked (I don't have enough information on the matter), but that was the intent of the tax credit transfer component.

Comment by John on January 7, 2009 at 9:10am

"Never forget that in an overwhelming majority of these companies more than half of the investment dollars come from out of State. These people are not getting any tax credits. "

According to the State's report (page 13), only 31% is from out of state investors.

Often, if not generally, those out of state investors are getting higher equity stakes than the market value of their investment. This is the whole 2 for 1 transfer issues. Mainland investors trade their credits to local investors for higher equity stakes (the local investor gets less equity but almost guaranteed profit on the extra credits).

In other words, the mainland investors risk is reduced as they get more of the company for less money. The local investor has even less risk because the 200% tax credits means they will make money regardless of how wasteful or crazy the startup acts.

The state, of course, absorbs this risk.

Comment by Patrick Ahler on January 7, 2009 at 8:43am

Although not an expert on the subject it's always been my opinion that 221/215 had the right intent but the wrong execution. Last year I attended a speaking engagement by Guy Kawasaki who brought up the same points you have been discussing here, that 221/215 does not encourage investors to invest for the right reasons (tax credits vs. the company's potential).

This is a very interesting and constructive debate, I'm looking forward to reading more.

Comment by GB Hajim on January 7, 2009 at 8:10am

"The investors risk is very low because they get the tax credits. The executive risk is low because they get good compensation packages and easy money subsidized by the state."

Never forget that in an overwhelming majority of these companies more than half of the investment dollars come from out of State. These people are not getting any tax credits. They will only join if you can show that the project has a reasonable ROI and a solid plan. I would say that there is even more scrutiny because you are asking for these people to invest in a company that is thousands of miles away in a climate that has not been historically friendly to business.

Comment by John on January 7, 2009 at 7:26am

"You say that "such and such is risky". Well, yes of course. It IS risky. That's what venture capital is. "

Tom, my concern is not about risk but how that risk is managed. When risk and reward are separated, it encourages people to take bad risks. Examples:

- Investment banks were historically partnerships where the bankers were the owners. In the last 10 to 20 years investment banks went public and the bankers no longer had much long term interest. Bank executives now where playing with other people's money, took crazy risks (CDOs, etc.), made lots of short term money then blew up the financial sector.

- Fred Wilson, the famous VC and blogger has a nice post on the risk of separating risk and reward. He examines bad actions that occur when executives are playing with other people's money.


221/215 encourages risky behavior because investors and executives have little downside but lots of upside. In other words, it encourages startups to take bad risks.

The investors risk is very low because they get the tax credits. The executive risk is low because they get good compensation packages and easy money subsidized by the state.

History shows people take less care and more risks when it's other people's money.

Finally, my point is about the structure of incentives. Just like some bankers were responsible, I am sure many 221/215 startups will be responsible. However, the way 221/215 is set up, it encourages bad risk taking.

Thoughts?

• ‹ Previous
• 1
• …
• 17
• 18
• 19
• 20
• 21
• …
• 23
• Next ›
• Page