4 State Policy Fixes to Grow Startups and Foster Entrepreneurship
By Melissa Roberts for Startup Grind
It’s election season, and although Presidential candidates seem to have captured the national attention, there’s been surprisingly little discussion about the role of startups in economic growth.
Despite all the media attention the Presidential election has garnered, entrepreneurs should focus closer to home — at the state and local levels — if their goal is to create policy change and grow vibrant local startup ecosystems. State governments have the power to offer powerful incentives that encourage private investment or provide a social safety net for entrepreneurs. In many ways, state government is the point where the rubber of entrepreneurial policy hits the road.
Here are four relatively low-impact ways that state policy and state legislatures can support the growth of entrepreneurial communities:
1. Encourage re-investment of local wealth created by successful startup investments
Angel investing has become commonplace across the country, with angel investment groups and networks popping up in all 50 states, according to the Angel Capital Association. But more angel investors doesn’t necessarily mean plentiful investment capital.
Even the most dedicated early-stage investors avoid putting all of their investment “eggs” in one early-stage “basket,” as they balance high-risk, high-reward investments with the rest of their portfolio. This means that investors generally dedicate only a small amount of their portfolio to early-stage investments.
So how does a state where angel investment plays an important startup funding role encourage investors to dedicate more resources to supporting early-stage companies?
For one, they can incentivize angels to reinvest the full amount of investment returns upon a good “exit” (generally the sale, acquisition or IPO of a company), mirroring similar federal legislation. Providing an exemption from taxes on capital gains from small business investments, provided that money is reinvested in other small businesses is a quick, common-sense way to exponentially grow pools of available angel capital within a few short years (or a few quick exits).
2. Attract top talent with less strict enforcement of non-compete agreements
Many entrepreneurs get their starts learning the ropes in a particular field, then leaving a company to start an entrepreneurial venue in a related business. In a situation in which potential entrepreneurs are forced to sign non-compete agreements, starting a company to disrupt an industry where you have expertise becomes a very tricky business indeed.
Many states either strictly enforce non-compete agreements, even when the employee in question holds no trade secrets and could not be considered a “key employee.” Some other states have no official stance on the enforcement of non-compete agreements, which experts at the Kauffman Foundation think might be even more harmful.
For many years, California has openly refused to enforce non-compete agreements. This is an important contributing factor to the labor mobility and innovation culture of Silicon Valley.
While California’s precedent was decided in the courts, nearby states like Oregon, Washington and Idaho have introduced legislation to limit the enforcement of non-compete agreements locally as well.
States across the country would do well to follow their lead, legislating limits to the enforcement of non-compete agreements. Some best practices include nullifying non-competes signed by seasonal or temporary employees, or restricting their enforcement to “key employees” or a one-year timeline.
3. Allow young companies to re-invest profits, rather than pay taxes
If you’re reading Startup Grind, the chance that you recognize the job-creating power of startups is high. That view is held by the Kauffman Foundation, which found that besides small businesses, new businesses are responsible for nearly all net job growth since 1988.
To accelerate the growth and job creating power of new businesses, states should consider slowly “graduating” newly profitable companies into paying corporate income tax.
By allowing companies a 100% exemption in the first year of profitability, a 50% exemption in the second year of profitability, and a 25% exemption in the third year of profitability, states can help growing businesses reinvest profits in creating more jobs in the critical early years.
4. Create a safety net that allows future entrepreneurs to take the leap
Entrepreneurs know that the choice to quit one’s day job and take the leap isn’t an easy one. But the challenge of securing basic social insurance like health care or unemployment insurance makes the entrepreneurial lifestyle even more difficult.
In addition to creating portable state health insurance plans for entrepreneurs, states can allow those who quit their jobs to continue to access unemployment insurance as they take steps to start a company.
These protections are perhaps most important for women entrepreneurs — those without access to health insurance coverage are 10% less likely to be self-employed.
Considering the results of November 8th, it may be increasingly hard to concentrate on the policy prescriptions that will help our country grow, rather than the fevered pitch of Presidential politics. Nevertheless, consider reaching out to your local and state elected officials. Although their names might appear in the headlines less often, they may have a greater ability to foster the growth of your entrepreneurial community than you ever considered.
Do you know how local and state policy impacts your business?
