Zaarly on Capitol Hill: Why the Startup Ecosystem Matters

5/13/11

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education or training, thereby allowing these individuals to participate in the private company investment market. We should find ways for smart, savvy individuals to make investments in private companies even if they do not yet have $1 million in assets.

I know many smart individuals that do not have $1 million in net worth that want to help make small investments and know the risks. We should make it easier for entrepreneurs to raise money from smart and savvy individuals – even if they aren’t millionaires.

—Private Market Regulations:

For many fast-growing private companies, there are two traditional paths to providing for liquidity of their stock for investors: a sale of the company or an offering on the public markets. Yet with the increasing costs of public company compliance and offerings, a third approach has developed that now offers shareholders and employees limited liquidity while reducing some of the burden on these fast-growing businesses: private markets.

For later-stage businesses, these private markets offer an alternative to a sale of the company or a public offering to provide liquidity to investors and employees. At the same time, this provides a greater sense of visibility and market pricing into the valuation of a business. This alternative option has an added benefit for early-stage businesses – it provides confidence for early stage investors that more than a single path to an exit event exists. Now, investors have the option of public or private offerings and a merger or acquisition event.

I urge the creation of more flexible rules and regulations to permit businesses to remain private companies, while allowing for the additional liquidity these private market provide. This includes modifications to the 499 shareholder threshold rules and the related solicitation regulations. This may not seem like it impacts early-stage entrepreneurs, but by increasing liquidity options (ways for employees and investors to get their money back from their investments) helps when those individuals reinvest back into the startup eco-system.

—Community-Funding Opportunities:

Today’s businesses are looking for funding from new sources (community-powered investment, angel investors, alternative loan structures, revenue-factoring, etc.) Dozens of organizations are powering microloans, crowd sourced social entrepreneurship and group-powered projects, most of which remain focused on international entrepreneurs or for non-profit aims. Yet the reality is that these structures provide a unique and powerful solution for current funding shortfalls affecting today’s small businesses and startup companies. Imagine a day when a community can come together and fund community-centered businesses through microloans, micro-investments or crowd-sourced funding. It is important for the … Next Page »

Eric Koester is co-founder and COO of Zaarly and an attorney, formerly with Cooley LLP. Follow @

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  • Gary Masner

    Eric,
    Great ideas, but let me add another piece to focus on. I retired after 10 years in Silicon Valley VC trade, and have been volunteering helping Colorado startups raise money. Most of these are good business ideas, but will never go public or raise VC money. They don’t want a C corp structure and look to angel investors for equity. The problem is the complexity of K-1 reporting for investors and the treatment of income. Investors are often repaid out of cash flow.
    We need a new form of tax structure for startups. Maybe a 10 year transition to a C corp structure, with investor paybacks being tax deductible to the company and capital gains to the investors.

  • marshall sterman

    concur with Eric’s recommendations/thoughts/observations but they do not address the need to change the mentality/anti-capitalistic/we versus them mentality of our regulators. The excess time/costs/inordinate delays over language/munitia in getting to final approvals has killed more financings than any rules and regs that most of us also regard as excessive.

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