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Sohodojo Advisory Board Member
Jim Schneider
The Taxman86 Speaks...
24 July 2000
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What the Dot-Com Startups Want; Washington, D.C. is Hot; Where the Lawyers are going?

1. Funky Offices Are In.

First it was South of Market Street Area in San Francisco, then the Silicon Alley in New York City, now it is the Business District in Washington, D.C. This article suggests that downtown Washington D.C. is filling up with high tech startups, they like the neighborhood. How about the tax incentives of the Washington, D.C. Enterprise Community, Enterprise Zone, or Restrictive Enterprise Zone? We suggest you go to 1899 L. Street, Washington, D.C. 20036, or 1722 I Street, Washington, D.C. 20006, or 1300 I Street, Washington, D.C. 20005 to see what the taxman may bring the founders, investors, and employees.

On the other hand it may be losses that we are looking at, and if so then it may be IRC Section 1244 that is important. Unfortunately that provision was enacted many years ago when $1M meant something small, and is not available if the stock issued is part of an issue that exceeds $1M. This eliminates IPO's.

Compare IRC Section 1202 where the term Qualified Small Business Corporation is one which has $50M in gross assets at the time of the issuance.

Our target then may be small startups, the Home-based Business types who want $1M or less in startup capital, and are looking for Angels. Here offering common stock that can be sold tax free under IRC Section 1045 if it goes well or take an ordinary loss if it does not may be attractive. Having that stock freely transferable could be another incentive, if there could be a market for such stock. If you want to see that world, the Angel World, check out "25102(n)" in the Google Search Engine, to see where things are going in the capital raising market. First item up is a No Action letter from the California Commissioner of Corporations for a San Diego Startup.

2. Venture Capital Comes to Washington, D.C.

It is always interesting to read a "Puff Piece" on the investment banking community, does anyone remember the book Liar's Poker, by Michael Lewis, or the movie Wall Street with Michael Douglas.

Is it possible to bring the creative VC energy into the distressed neighborhoods, like the North Side of Philadelphia? Is Los Angeles any better with the Staples Center Area? The answer could be from the kids who are driving the music industry crazy. Give them a few dollars, their computers, and off they go.

3. The Legal World Is Into The Web Bigtime.

If you have not seen Find Law you have missed something. Go to their "Tech Deal" section and see how the big guys play the high tech startup game. Qualified Stock Option Plans are running second to Restricted Stock Plans, or stock options which can be immediately exercised into Restricted Stock and we think we know why. It is the tax benefits.

Jim Schneider, LL.M.

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