Angel tax credits - an overview and an evaluation

The Angel Capital Association lists 27 angel investor tax incentive programs by state.   Angel investors are “high net worth individuals who invest directly into promising entrepreneurial businesses in return for stock in the companies.” From an economic development point of view, angel investment is considered a critical element of an innovation ecosystem and a way to support innovative companies with high growth potential.

Minnesota’s Angel Tax Credit (ATC) program is designed to encourage equity investments in early stage technology businesses by reducing the risk of investment through tax credits for qualified investors who make investments in qualified small businesses (QSBs).  Investors receive a 25% refundable tax credit for their investments.  The legislature appropriated $12 million in annual funding for the ATC program through 2014.

Economic Development Research Group and Karl F. Seidman Consulting Services prepared an evaluation of the ATC for the Minnesota House and Senate earlier this year.  Findings included:

  • $34.2 million in angel tax credits were issued from 2010-2012.
  • 1,374 qualified investors invested a total of $138 million in 196 qualified small businesses over this period.
  • An estimated $71.7 million in angel investments is attributable to the ATC.
  • Medical devices & equipment plus software account for 45% of QSBs by industry type
  • A survey of qualified investors found that 48% would not have made the investment without the ATC
  • 40% of qualified investors were a founder, executive, principal or board member in the QSB in which they invested, while another 10% were immediate family members.  These “inside investors” accounted for 42% of total qualified investments.
  • Attributable QSB activity resulted in an estimated average of 98 direct jobs from 2010-2012.
  • It is estimated that from a state budget standpoint, the program will not pay for itself within ten years.

This is a good report with several interesting approaches to a comprehensive program evaluation, including surveys, use of the REMI economic impact model, an alternate use analysis, and detailed discussion of assumptions and sensitivity to several parameters.  I recommend the full report, which can be accessed here

This is an important and growing category of incentive, so look for more blog posts on tax credits and programs designed to spur innovation investments in the coming months.

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