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This post is a translation of the article: « Pigeons » : le cri d'alarme d'un fonds américain published on LaTribune (12/10/2012) and is a response to the proposed tax law proposed by the government of Francois Hollande, suggesting to tax all capital gain at the same level than salaries or 60%.
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While France has
been a fertile ground for innovative start-ups, the new fiscal law threatens to
disrupt an ecosystem that has slowly emerged over the past 12 years. Instead of
increasing the tax burden on these companies driving job creation, why not take
full advantage of this evolution of the tax law to position France as the most
attractive country for entrepreneurs in Europe?
France has proven
its ability to develop innovative internet models
Over the past three years, we have invested over $60 million in
French technology start-ups with Showroomprive (number 2 in Europe for online private
sales), BlaBlaCar (Covoiturage.fr
the European leader in ride-sharing) and Shopmium (offering coupons via a
mobile app) and as a result have contributed to creating close to 600 jobs. While
our investment focus covers all of Europe, we consider France to be a very
important market for our business and we are actively seeking new investment
opportunities.
France is indeed a country with a
proven track record of developing innovative business models.
Here are a few examples: the “flash sales” model was launched by VentePrivee
and Showroomprive, the two European leaders and has been copied in the US by
several companies such as Gilt Groupe; “online retargeting” was invented by Criteo,
who currently operates in 30 countries with over 3,000 customers and whose
success relies, among other things, on its 10,000m2 R&D centre located
downtown Paris. Since its launch, Criteo has created 800 jobs, 40% of those in
R&D; France has also been a pioneer in the space of ride-sharing with the creation
of covoiturage.fr, a company that has built a strong community of over 2
million members and transporting a number of passengers equivalent of 1,000 high
speed trains every month. And the list of success stories continues with
companies such as Free, Meetic, AuFeminin.com, PriceMinister, SeLoger…
The second strength of France resides
in its talent pool of entrepreneurs. With the experience accumulated during the
first internet boom, this talent pool has grown considerably and gained in
strength over the past few years. Those who have enjoyed success have given
back to the community as business angels, through the creation of seed funds
such as ISAI, Kima Ventures or Jaina Capital, or by sharing their personal
experience through forums, conferences or teaching. A good example is the
creation of École Européenne des Métiers de l'Internet (EEMI) in September
2011, founded by Marc Simoncini (Meetic), Jacques Antoine Granjon (Vente-privee.com)
and Xaviel Niel (FREE).
Finally, another notable strength of
France resides in its Telecom infrastructure. Indeed, France enjoys the highest
penetration rate for broadband in Europe (32.7% for France vs. 26.5% on average
in Europe according to Eurostat, Jan. 2011).
Amendments proposed to the 2013 Tax law are insufficient and threaten to destabilize the ecosystem
I will not go over the initial
regulation proposal, which recommended a 60% tax rate on profits made by
entrepreneurs after an exit (basic idea is to apply same tax rate on salary and
capital gains). Instead, I will focus the discussion on the recent amendments
suggested by the minister of economy and explain why these amendments are
insufficient and threaten the growth of a booming ecosystem that has already
proven to be and should remain a source of job creation.
The first amendment relies on the
definition of « founder » and imposes a minimal ownership of 10% of
the company and a holding period of two to five years to benefit from a lower
tax rate. Let’s examine first the ownership constraint proposed by the
amendment: the ownership level of a founder in his / her company depends on two
key factors: the number of founders in the start-up and the potential dilution
that occurs with fund raising (needed to sustain the company’s growth).
Imposing a minimum ownership threshold on founders penalizes teams with several
co-founders, while the combination of talents and skill sets coming from having
several co-founders is usually core to the success of a start-up. This proposal
also penalizes companies that have struggled to grow and had to raise several
round of funding before reaching a critical mass, and have therefore been diluted
more than they would have liked. Finally, it puts a break on the fast growing
start-ups that could benefit from an additional injection of capital to fuel
their growth but won’t do it to avoid further dilution. In our portfolio, we
have companies with founding CEOs who own less than 10% of their companies for
some of the reasons I just listed. Why should they be penalised in such an
arbitrary way? The duration criterion is also very punitive for start-ups
playing in the dynamic technology market. Let’s take an example in our
portfolio: Playfish, a “social gaming” company, was launched in London in 2007.
It enjoyed explosive growth, created 200 jobs in two years, and was acquired in
2009 by the American giant Electronic Arts. If that company had had to comply
with the proposed regulation, its founding partners would have faced the
following dilemma: either forfeit 60% of their gains in tax, or … ask
Electronic Arts to come back later. Why should rapid success stories be
penalised more than companies whose success is slower to come?
The second amendment proposes to apply
tax rebates on capital gains applicable over a six years period for those who
cannot meet the founder status. While this measure also relies on an arbitrary
duration, which does not account for the dynamic environment in which start-ups
operate, it will also create inequalities among start-up teams by dividing them
into three “classes”: the “founders” who will be protected in some instances,
the employees who have received stock options (and will fortunately not be
impacted by this regulation) and the employees who have received shares and
will be subject to a complex tax waiver scheme. Is this the “social justice”
announced by the government?
To conclude, the ecosystem of internet
start-ups is based on three key stakeholders: the entrepreneurs, who create the
start-ups, the employees, who contribute to their success and the investors
(business angels and venture capitalists), who invest capital to fuel growth.
Those three constituents share the risks and play a key role in the development
of start-ups. The proposed law, instead of bringing more cohesion to the
ecosystem and aligning stakeholders’ interests, will in fact introduce
inequalities that will ultimately lead to disequilibrium and conflicts… in
addition to adding unnecessary complexity to the model.
Why not take advantage of this law to make France the champion of Entrepreneurship in Europe?
Instead of introducing extra layers of
complexity and penalising both start-ups and entrepreneurs, why not going back
to simplicity and proposing positive changes that would position France as a
beacon for innovation and entrepreneurship in Europe?
If we all agree that start-ups need to
be protected given they are a unique vector of economic growth and job creation,
why not take a step further and give them an attractive tax rate that could
apply equally to all shareholders independently of any ownership level or
duration? Why not apply a 15% tax rate on all capital gains coming from start-ups?
Not only would such a measure boost the French technology ecosystem, but it
would also attract entrepreneurs and investors to France.
One way to create boundaries for this
proposal, would be to apply it only to shares acquired during the first twelve
years of a start-up’s existence, after this date all transactions would be
taxed at the current capital gain tax rate (regardless what the rate is –
although I personally do not agree with the tax rate currently proposed by the
government). So why twelve years? While
that threshold should be thought through, it would apply well to our current
portfolio: among the 250+ active companies we have funded, the proportion of
those founded before 2000 is minimal.
Such a change would play to France’s
advantage and give a boost to the start-up ecosystem. Why not take a chance?
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