I have a board meeting on Friday, so I spent much of yesterday holed up with accountants going over our numbers. For a 10-month old startup, we are doing pretty well. We have a lean staff of 15 people, and are actually bringing in revenue and substantially trimming our burn rate. We have more than a year of money left in the bank.
But I’ve come to appreciate the anxiety only an entrepreneur can know of watching your company lose money every month. Even the most steel-eyed believer who is utterly convinced the world needs his product, has a momentary pang before every board meeting when he checks in on those numbers and sees that nest egg continue to dwindle.
And most startups are nowhere near as well off as we are. With a glut of over-funding at the seed level, most of the youngest companies funded today simply won’t raise a Series A once that initial investment is up. That’s just the market reality. I recently went to a mixer for the portfolio of one of the seed funds that invested in us, and looking around the room I saw looks of total terror on the faces of most of the founders. No one said it but it was one of those moments of: Look around the room, only 20% of you will likely raise a Series A.
This is why San Francisco’s ludicrous payroll tax enrages me so much.
Considering that companies less than five years old have created all net new job creation in this country, every other city in the US– in the world even– would die to have the startup culture we take for granted here. And yet San Francisco is the only city in the United States that taxes companies based on payroll. That means for every employee hired, companies are charged more money. And startups are charged the same rate as large companies. There’s a reason no other city in the US does it this way: It’s idiotic.
I have long hated San Francisco’s overly-progressive politics and was one of the first people to start demanding changes in the way it taxes companies– particularly as it relates to startups. The city government didn’t even realize the implications of their own taxes on tech companies until I wrote this. So the idiocy of this policy is nothing new to me.
And yet, even I was surprised how early it starts: According to my accountants yesterday all you have to have is $250,000 a year in payroll. That pretty much taxes everything except sole proprietorships.
Here’s the point: When San Franciscans hear payroll tax reform they think Zynga and Twitter, and they get up in arms that those companies won’t “pay their fare share.” That’s not what we are talking about here. We are talking about the tiniest of startups who are in the earliest stages of trying to beat the odds being penalized for each hire they make.
Meanwhile, large retailers and financial services companies, and yes, big tech companies like Zynga and Twitter are also taxed the same way.
Sf.citi– a coalition of the City’s tech interests lead by Ron Conway– has helped get a measure on the ballot that would change this. Companies will still be taxed. There is plenty of paying everyone’s fair share, so calm down progressives. But it’s based on sales tax, not employment. That means as companies actually make money, they give back to the city’s coffers. And it taxes financial services firms, and other industries that have a far higher sales-per-employee ratio, more than a money-losing startup.
It makes so much obvious, duh, no-brainer sense that nearly everyone in our famously divided and squabbling city government supports it: The Mayor, The San Francisco Democratic Party, The San Francisco Republican Party, the entire board of supervisors. Even the San Francisco Bay Guardian– who I have never ever ever agreed on a single issue with– endorses it. It should bring in more revenue for the city, while exempting companies who make less than $1 million a year in revenues.
And yet, even still, the polls a few weeks ago showed that 40% were likely to vote no, simply because it involves taxes and 20% are undecided. This obvious thing everyone wants is in real danger of not passing.
If you are reading this blog, you likely work for, invest in or would like to work for a startup. Or maybe you merely love using the new tech products they create. Or you just like reading our rants about them. Whatever the reason voting Yes on Proposition E helps you do more of that. It keeps us all in business, by helping our seed funding stretch a bit further before we have to pay the city back for the luxury of building a company here.
What happens if the city doesn’t reform taxes? Some companies will stay. But many will start to relocate. Remember: The city is just seven miles by seven miles in size. So for most of us, moving our headquarters just a few miles to another suburb exempts us from paying this unnecessary tax which gets the more onerous with each hire. It’s not an idle threat.
And that would be a shame. Startups being headquartered in San Francisco is a relatively new phenomenon, and it’s been an exciting one. Nothing against Palo Alto, but the young talent this ecosystem runs on likes living in cities. And copious research has shown that more innovation and creativity springs from companies co-located in dense urban areas.
Entrepreneurs are a strange breed. We think we can rip apart every industry under the sun and rebuild it in the way we wish it could be, but when it comes to the government, we sigh, throw up our hands and assume it’ll always be dysfunctional. Today is a rare time when you can actually make a major change in the San Francisco startup ecosystem. If you live in San Francisco and are just waking up and heading to the polls, please vote yes on Proposition E and help all of our burn rates stretch just a little bit further.