Five Things I Learned About the Tax and Legal Implications of Angel Investing

The Impact Angel Group recently held an event at the Impact HUB for angel investors entitled “Managing Your Personal and Tax Liability”.  We received some great advice from Jeremy Wilson of EKS&H and Laurel Durham and Mark Weakley of Bryan Cave LLP. Here are my top five takeaways…

First, the technical tax stuff, courtesy of Jeremy Wilson from EKS&H

1) There’s a new 3.8% Medicare surtax levied on net investment income that went into effect on January 1, 2013. A 3.8% tax is charged on the lessor of any net investment income, or the amount by which Modified Adjusted Gross Income (MAGI) exceeds the threshold amount ($200K for individuals, $250K for couples filing jointly, and $125K for spouses filing separately).

2) Investors also need to take the loss on an investment in the year it becomes worthless or when the company is sold at a value less than the investor’s cost basis (normally the amount paid for the investment).  Going through an investment down round doesn’t count as a loss.

Now to finish off my top five, here are some tips from Laurel Durham and Mark Weakley, our legal expert guests from Bryan Cave LLP:

3) Laurel and Mark advised angel investors to create their own LLC (or other entity) as a structure from which to make their investments. Using an entity helps angel investors mitigate personal liability and assist with record keeping.

4) If investors want to formally advise a startup that doesn’t carry D & O (Directors and Officers) insurance, it may be better for investors to act as an advisor rather than a formal board member to mitigate potential liability issues.

5) As a general rule, it is best for angel investors to avoid signing Non-Disclosure Agreements (NDAs) with entrepreneurs.  However, investors can sign confidentiality agreements when joining or sharing information with formal angel investor groups.  These agreements don’t normally contain the restrictive clauses of NDAs and the commitment being made is among the investors, not with the entrepreneur/startup.

And, actually, given the complexity of some of the information shared, the most important lesson I learned is that it really does make sense for angel investors to consult with tax and legal professionals.  It goes a long way towards assuring that the dreaded L word (liability!) is always on the radar screen!

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