US Government Plans To Incentivize Angels

The Wall Street Journal (WSJ) reported about proposed legislation today which would give angel investors (individuals with a net worth north of $1 million who invest in early stage companies) a 25% tax credit on investments in start-ups up to $500,000 on the condition that they make at least 2 investments in that year for up to $250,000 in each business.

This idea might have a positive impact in Silicon Valley, especially if scarcer liquidity options put pressure on early stage investing in the next year or two.

According to the Center for Venture Research at the University of New Hampshire, US angels and VCs invested about $23 billion and $22 billion in about 50,000 and 3,000 deals, respectively in 2005. One can argue that those initial higher risk investments allowed for the riskier ideas that had merit to potentially prosper and at least reach a maturity stage where they could be further funded by established VCs increasing the chances of success further.

The point of angel investing is to support a company financially when the risk is biggest. One of the functions of angel investors that's as important as their financial support, is their knowledge and advice. Both have a positive impact in making great ideas a reality. The proposed legislation can only help by making it more attractive for angel investors to invest in early stage companies and increasing total angel investment for promising start-ups.