Entrepreneur tax???

Entrepreneur tax. Just savour that phrase. At a time when, in my opinion, Denmark needs all the entrepreneurship it can get, politicians choose to make investing in small businesses less attractive. I think they need to think again.

That is the tax I am reacting to here in May 2010. I am angry that an extra burden is being added right where entrepreneurs need to find money to develop their businesses. The figures and tax rules I discuss are my account of the debate at the time.

The entrepreneur tax hits people who help small businesses

We need to get things moving. We need exports and people to get their hands out of their pockets. I believe entrepreneurs create enormous value through jobs and growth. That is why we should make it easier to help them get ahead.

Instead, I feel we are punishing private investors who spend time and money on small businesses. These are people who could spend their money on themselves and go to Gran Canaria, but choose to invest in helping a business grow.

Throwing money at this sort of thing is hardly pure pleasure. The risk is high, and you can also spend a hell of a lot of time helping. Yet now they want to tax them more heavily.

A stake below ten percent does not necessarily start out small

As I describe it in the video, you already pay something like half the profit in tax. With the additional 25 percent layer, I talk about a total burden of around 67 percent when the ownership stake is below ten percent. My criticism is based on that calculation from 2010.

You might ask who would even bother buying such a small part of a company. But many business angels end up owning small stakes. They are private investors who put money into several businesses and spread their risk.

Some have plenty of time, perhaps because they are retired. Others invest and help businesses professionally. They may well start with a stake of 15, 20 or 25 percent.

As long as their stake is above ten percent, you might think this is not their problem. But that can change when the business needs more capital.

More funding rounds can push the investor below the threshold

Imagine an investor with 25 percent of a bloody exciting company. The company needs a few million more. The investor already has money in ten businesses and wants to spread the risk, so he asks another business angel whether they want to join.

The new investor brings in money, and the first investor’s stake shrinks. In my example, it falls to around 12 or 13 percent.

Then another funding round is needed, and a new investor joins. Suddenly, the earlier investors are below ten percent. They did not necessarily choose to be small shareholders from the outset. The company’s need for more money has brought them there.

And then the extra tax kicks in, in the example I am discussing. I think that is really, really stupid. You risk hitting the people who helped the company get started precisely because it now needs more capital to move forward.

What does it cost in lost investments?

I have read in the newspapers that, at best, the tax could bring in around DKK 200 million. Of course, that sounds like a lot of money.

But I also refer to studies of investments that never happen, and to a figure saying that 67 percent of business angels have already declined to invest in smaller businesses because of the tax. Those are the details from the debate at the time that I am reacting to.

My question is: is it smart to bring money in through one door if we simultaneously scare investment away from the businesses that are supposed to create growth? No, I bloody well do not think so.

Make entrepreneurship easier instead

I hope politicians start to see how much value entrepreneurs bring to society. To me, it seems there is more political interest in investing in people who bang away with rubber stamps and shuffle papers.

I am tired of political competition over large, bureaucratic public investments, with politicians trying to outbid one another to avoid being called uncaring. Where is the interest in getting private initiative to create something?

Get rid of the taxes and duties that get in the way. This is about making entrepreneurship easy and really exciting, rather than piling extra tax onto the places entrepreneurs get their money from.

That is my view of the entrepreneur tax in 2010. I think the decision should be reversed, and I want to have that debate.

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Best, Martin