Friday, June 17, 2011

Destiny, taxes, and founding equity

Adjustment BureauI watched The Adjustment Bureau with Matt Damon the other night – diverting and touches on some good philosophic issues. Are our actions determined (predestination), or our outcomes determined (destiny), or neither (free will)? And how could we ever know?  The movie’s “Adjusters” keeping people on track towards their destiny, at one point justifying their actions by revealing

If you leave her, she will become a legendary dancer and a world-renowned choreographer. If she stays with you, she will spend her life teaching dance to sixth-graders.

That is absolutely haunting; is it true? Can our lives be determined to that degree by our choice of affections? I want to believe that our talent ultimately carries us, modulated by partners who can help or hinder (and who we facilitate in return, who we mutually grow and flourish with).

==================

Too big to failMore prosaically, Barclays started withholding tax on my UK bank accounts, even though I’m resident in the Netherlands.  They gave me HMRC form R85: Getting your interest without tax taken off, but then returned the completed form to me, saying that it only applies to UK residents. 

A bit of research followed, and the correct form is IR 105: Application for a not normally resident saver to receive interest without tax taken off.

I do like the clarity of British labeling: the comparable US form is called “Request for Taxpayer Certification”

And, yes, too much time is spent managing this kind of trivia.  But if you don’t, it’s death by a thousand small cuts.

=================

Facebook foundersWhen starting a  new company, there is always the question of how to divide the starting shares.  The easiest thing is to simply split the equity equally, or in proportion to contribution.  Now, Norm Wasserman, a Harvard business researcher looked at 500 US startups and found:

  • The more varied the team is in entrepreneurial experience, idea generation, and capital contributions, the lower the probability of equal splitting.
  • The larger the founding team, the less likely it is to divide shares equally.
  • The more combined work experience a team has, the less likely the team will split the shares equally.
  • Teams where founders are related through family are more likely to split the equity equally.
  • An equal split is associated with a lower valuation than an unequal split, especially in cases of quick negotiations.
  • Founders who split equally when they should split unequally may be giving up a substantial amount of financial value. (Related research suggests that such teams may also be less stable.)

It’s interesting research: in my experience, I’ve found that folks contributing money often want a disproportionate share, arguing that they are ”the only ones with something to lose”.  They also tend to be more sensitive to having their proportion or terms challenged.  Work experience, entrepreneurial experience, and contribution to the founding idea should also count alongside the amount of capital invested into the venture.

And the negotiating tactics of contestants on Dragons Den and the Apprentice are absolutely miserable. They beg rather than trade and, predictably, the Alan Sugar’s of the world call their bluff every time and walk away with the deal.  It’s painful to watch.

Wednesday, June 15, 2011

Thinking whilst on the beach.

How do you know if an idea is any good?

The real test for me is if the idea builds momentum the more time you spend with it. I'm a big believer that you have to spend a lot of time with an idea. Good ideas get stronger the more you work on them. You begin to lose interest in weak ideas.  Jake Winebaum

I’ve always subscribed to the notion that good ideas are generative – they create excitement and spawn more ideas.  Bad ideas, in contrast, become *work* – work to persuade people that they are correct, work to fix the problems that seem to come from them.

How crazy are people at the top?

p-testMadness is a more powerful engine in society than rationality.  Capitalism, at its most ruthless, is a manifestation of psychopathy; while only one per cent of the population are psychopaths, four per cent of business leaders meet the criteria.  I went through the test with (executive Al Dunlap) and he confessed to a huge number of items, redefining them ‘business positives’.  Jon Ronson

Overall, while some leaders are motivated by altruism or vision, I think that a significant number are overcompensating for perceived flaws or slights, while others are simply self-serving (the best I can do, since DSM V is eliminating narcissism as a personality trait).  These people, to the extent that they gain power and followers, cause enormous collateral damage to careers, institutions, and society.

If you want to take the test, it’s here, and, as you work through it, for get the business leaders for a moment…what about the politicians?

How do we counter the Tea Party?

Far from being the respected ‘salt of the earth’ the working classes have been demonized as political and business leaders destroy industries, dismantle safety nets, break the unions, and foster grasping individualism in place of community values. We focus on a "kiss up, kick down" politics, in which ordinary people pay for the bankers' crisis, while everyday being attacked across the media world.   The Independent

‘most often, by the conservative voices of the wealthy who co-opt the rhetoric of populism.  It started in the  Reagan / Thatcher Revolutions, pressing dual agendas of trickle-down economics and strident individualism against government institutions.  I keep thinking that the movements will run their course as the crippling economic flaws and deep social costs mount, but somehow the rhetoric keeps suppressing the facts.

I’m not sure how bad it will have to get before people, collectively realize it and act: journalist Johann Hari is a good tonic (How to build a left-wing Tea Party), based on an article in The Nation.

Tuesday, June 14, 2011

Op de trein

RoutesI was tootling around the countryside all day today, hopping from one outpost to the next on the East Coast line.  I needed to get from Cambridge up to Sheffield for meetings, 60 GBP round trip, 3 hours each way.

In general, I prefer the train over the car for cross-country trips – I can work, eat, daydream without having to worry about routing, traffic, stressful drivers, and bad weather.

It’s the daydreaming bit that gets me into trouble, though.

The trip was planned from Cambridge to Peterborough to Retford to Sheffield, about an hour each leg.  On the Tube, I count stations and generally have a good sense of when I’m coming up on a change.  But I don’t know the stops up north and so I managed to have everything spread across my worktable when the Retford station signs appeared outside the window.  Damn.  The train was moving on before I could pick up.  Fortunately, Doncaster was next, essentially doing two legs of a triangle instead of cutting across, but it only added 20 minutes.

I resolved to be more vigilant.  So, when the loudspeaker crackled “Sheffield”, I was ready.  Bags under my arm, coat over my shoulder, I bounded off the train and up the construction entry, passing the “Book your booze cruise with us” announcement alongside a forlorn barge on a rubbish-strewn canal.  At the road I looked for the tram up to the University – nothing in sight, but the construction probably put me out the other side.  No matter, I hailed a cab and swung inside.

“To the University, please!”  The driver looked baffled.  Which one?  “Sheffield”  Still no recognition.  “Straight up the hill; follow the tram line?”  You’re sure?    Natuurlijk.

Off we go, around the station, over the hill, onto the highway, headed west.

“Ummm – where’s Sheffield?”  About seven miles up the road.  “I got off at the wrong station.”  You want to go back? 

My hosts were very nice about my late arrival.   They told me about a foreign student that they once had who assumed that the trains ran on time.  He knew that he was due into Sheffield at 2:10 pm so, when his watch said 2:10 and the train was stopped in a station, he got off.  Apparently miles away from Sheffield; we was similarly lost trying to get to the labs.

I think I don’t feel so bad…?

Monday, June 13, 2011

How high are Europe’s taxes?

Taxes      52.

That number symbolizes the burden that Dutch taxpayers bear: it’s the marginal tax rate for annual income above 50,000 euros.  It’s Exhibit A for my American friends concerned about the Dead Hand of Government and Creeping Socialism.

For them, bigger government == less freedom.  Or, as Reagan / Bush economic advisor Bruce Bartlett puts it, “the bigger government is as a share of G.D.P., the less freedom there is for the people (if government consumes, say, 40 percent of G.D.P., then people are only 60 percent free).”  He notes that US taxpayers contribute only 26% of GDP to taxes, while the Dutch give up 39%.

However, he posted an interesting counter-analysis in his NY Times blog Economix last week, asking What benefits do Europeans get for their higher taxes?  Two big answers were direct subsidies for early child care (parental leave, wellness, and family allowances) and health insurance.  In fact, once the cost of health care as a percentage of GDP is added in, the resulting figures are much closer:

health care

He’s a conservative, remember, yet he concludes

Middle-class Europeans get cash benefits from government that offset much of the tax burden in a way that the United States offers only for the poor. There may be reasons why it is better not to subsidize every family with children and not provide government health insurance for every citizen. But the idea that Europeans are enslaved by high taxes, as most American conservatives believe, is just nonsense.

I’ve got to applaud his intellectual honesty: if only the tea party folks could see as clearly.

Further, I have the 30% rule working for me in the Netherlands, where the first third of my income is free from all taxation.  I am taxed 25% on business profits (vs 35% in the US) and get VAT refunds as a small business.  In the end, I think I pay about 38% on my personal income in the Netherlands, less than I would in the US (and that is before I add in deductions in the US for Medicare and Social Security, which I don’t pay here).

The acid test is whether I owe a differential after taxes are computed against the same income in both the Netherlands and the US.  By the end of summer, I’ll know which way it flows: if I owe anything in the US, it’s because taxes are higher there.

Sunday, June 12, 2011

A bit of light reading

I’m buried with Dutch and work today, so this will be a short take on some literature that I found engaging.

  -- I wrote Friday about the central role that good, crisp decision-making plays in effective organizations.  Over the weekend I came across an HBR Working Knowledge article that proposed a “Litmus Test” to determine if you have what it takes to be an entrepreneur.  Their key questions are:

  • Are you comfortable stretching the rules?
  • Are you prepared to make powerful enemies?
  • Do you have the patience to start small?
  • Are you willing to shift strategies quickly?
  • Are you a closer?

I generally do well on this: I can do wonders at finding creative approaches, getting a lot done with a few resources, recruiting partners, staying flexible, focusing and prioritizing work, and leveraging early results.

‘haven’t made any powerful enemies yet, thank goodness.

Closing, in the article, means both coming to closure on decisions, which I do well, and closing deals, where I have a mixed record.  I am good at communicating and getting consensus, at negotiating to common ground and building goodwill.  But drilling down to the sale, getting the money, taking favorable terms, is hard.  A deal slipped through my fingers over the weekend because of a moment’s wrong choice.  It’s frustrating.

But then I nailed another one today.  So, I’m not hopeless. Just not good at landing the big fish, in time, every time.

  -- The Financial Times ran an article about looming tax penalties for US expats.  Where expats from most countries need to file returns only where they’ve earned income, US citizens need to file both home- and work-country returns.  Hypothetical US tax is calculated on income earned abroad, then foreign taxes are deducted: you pay the difference (no refunds or carry-forward, generally).  This has generally worked by the honor system, but from 2013 “banks across the world will be required to hand over details of accounts containing at least $50,000 belonging to US clients or face a withholding tax”  Failure to comply means a penalty of 20% of the value of the account.

I have accountants in the Netherlands and the US who watch over me, and file diligently in both countries.  Even so, I had to do a reset of my situation last week: the complexity of paying US, Dutch, and UK taxes had overwhelmed my system.

It’s not just taxes.  It’s getting correct VAT advice and refunds, establishing the correct reporting basis for the business at inception (you live forever with what you choose), and securing tax breaks (eg: the wonderful Dutch 30% Rule).  Truly vast amounts of money can drain away to state coffers unless you take reasonable care (and pay about $1000 per year per country for advice and filings)