American Entrepreneurs – Be Happy You Are Not In Spain

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A version of this article previously appeared in Forbes.

One of my top former students, Fredi Fernandez, recently sent me a compelling email. After studying at UC Santa Barbara's entrepreneurial program, he returned to Spain, excited to start a venture and make a positive impact on his homeland.

He founded Alpha Origins in 2011. Although he has helped a number of startups gain traction, he is now questioning if he should flee Spain, given the recent passage of the unprecedented Exit Tax, which seeks to tax potential, unrealized wealth.

Fredi's email is worth reading, as it reinforces how lucky American entrepreneurs truly are. It is difficult to not be moved by his passionate desire for his country to share the entrepreneurial spirit that he experienced during his stay in California.

One could certainly argue that the US government could be more business friendly. However, when compared to the anti-startup environment prevalent in Spain, the relative degree to which entrepreneurship is an indelible aspect of American society is undeniable.

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Geographically, the distance between Spain and the US is about 4,715 miles. However, from an entrepreneur's viewpoint, the philosophical distance can be measured in light years.

Fredi's Plea

"Any prosperous society should love having talented entrepreneurs that create not just a new and better future but also jobs, knowledge and a dynamic and optimistic environment. Sadly enough not everyone understands this.

Imagine a country with a massive unemployment problem, recently over 24%, yet still with a great capacity to attract international talent, amazing weather and infrastructures. As a government, would you give incentives to build an entrepreneurial ecosystem or would you try to squeeze it?

If you were part of the current Spanish government, the very same government struggling with a huge unemployment problem, you might have a different answer. There have been many examples of Spain's anti-entrepreneurial efforts, including forbidding Airbnb and Uber activities. Even Google News decided to close in Spain due, to a new law designed to protect legacy businesses. We can understand how disruptive companies affect entire industries. Change hurts, disruption hurts and it's not easy to keep everyone happy. Got it!

The part we entrepreneurs don't quite understand is the new "Exit Tax," effective January 2015, which imposes an onerous fee on potential gains, triggered when an investor or founder moves from Spain.

What?

Yes. Although 75% of VC funds in Spain come from abroad, the government has decided to punish capital outflows. It considers as capital gain the difference between the acquisition value of the shares or stock owned by the taxpayer and the market value of the shares at the moment the border is crossed. Thus, it's a tax on potential, not actual, gains. You can read the details here.

The Exit Tax will be a huge deterrent to companies that want to expand overseas. It will also discourage both local and foreign investors. Despite the real effect of the measure, what concerns Spanish entrepreneurs the most is the message that Spain is sending to its own entrepreneurial ecosystem and the entire world.

When the most active Spanish VCs are encouraging entrepreneurs to go to London, Singapore, Shanghai, New York, Chicago or Israel instead of starting companies up in Spain, the impact of the Exit Tax is clear. As Luís Cabiedes, a successful Spanish VC stated, "entrepreneurs now in Spain have to be either heroic or irresponsible."

Evolution dictates that entrepreneurs will keep moving and creating the future whether they are in Spain or abroad. Let's hope that the Spanish government learns this lesson quickly or Spanish talent will keep fleeing to more attractive entrepreneurial hubs. Sadly, that is something Spain cannot afford."

Follow my startup-oriented Twitter feed here: @johngreathouse. I promise I will never tweet you about lousy music or tell you about that killer burrito I just ate.

Photo Credits: Fredi Fernandez

John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara's Faculty where he teaches several entrepreneurial courses.

Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.

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