VC dollars crash in state BY JENNIFER BISSELL
jbissell@westfairinc.com
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espite an overall increase in venture capital dollars compared with the previous quarter, the irregular VC trends continued in the second quarter of 2012, both nationally and in the New York metro area, according to a MoneyTree Report based on Thomson Reuters data. The total amount of money invested nationally increased 17 percent compared to quarter one, with $7 billion invested in 898 deals. But with relatively low-funding levels in the first quarter, the year’s totals are still projected to fall short of the $30 billion invested in 2011, yet exceed the $23 billion invested in 2010, said Tracy Lefteroff, a PwC global managing partner, in a press release. PwC and the National Venture Capital Association assembled the report. Similarly, the New York metro area saw VC dollars increase 52 percent this quarter – with $567 million invested in 100 companies – but compared to this time last year, it’s still a 15 percent decrease.
“Venture capital continues to be invested in Connecticut biotech, medical device, IT and software companies. However, the number of deals in Connecticut this quarter is disappointing.” — Owen Davis, PwC partner in Stamford
All but one of the eight deals in Connecticut were included in the New York metro data. In Norwalk, an expanding software company received $2.4 million and in Stamford a startup medical device company received $1 million. Overall, however, Connecticut companies mustered just $13 million in funding across eight deals. “Venture capital continues to be invested in Connecticut biotech, medi-
cal device, IT and software companies,” said Owen Davis, a PwC partner in Stamford. “However, the number of deals in Connecticut this quarter is disappointing. In addition, the dollars invested are not keeping pace with national venture capital investment levels.” Companies related to software and the Internet received the most capital, while companies in the life sciences and clean technology sectors saw continued decreases. At the national level, VC dollars to the software industry increased 38 percent from last quarter to $2.3 billion, which is the highest quarterly total since 2001. Life sciences, which includes biotechnology and medical devices, decreased for the second consecutive quarter, by 9 percent to $1.4 billion. Funding to biotechnology is at its lowest quarter result since 2003. “I think it’s more of a reflection that the Internet is a very hot area right now,” stated David Silverman, a PwC partner. “It’s always been an area of investment since the mid 90s.” But with the success of social media and evolving e-commerce models, such as daily deal websites and better online catalogues, there has been an up-tick in interest. Plus, with relatively efficient models and low operating costs, Internet companies can be an attractive investment compared to a costly life-sciences project. In the New York metro area, 47 percent of VC funding went to software and IT services, totaling $264.2 million invested in 44 companies. While the New York metro’s funding and industry mix mirrored national trends this quarter, it differed in what stage of development companies receiving funds were classified. Roughly half of New York metro deals went to companies in the expansion stage, while 35 percent went to those in the seed or early stage. Nationally, the majority of funding went to companies in seed or early stages. Both stages increased in dollars and the number of deals this quarter, accounting for 53 percent of the total deal volume. Only 26 percent of deals were in the expansion stage. “New York continues to demonstrate a very healthy mix of stage of investment funding,” Silverman stated. “With a significant portion of deals and dollars focused on the early stage, (we’re) providing ample opportunity to and for young startups, followed by strong funding in the expansion stage to enable the continued growth of these companies.”
Citrin Cooperman Corner
Employee or Independent Contractor? BY WILLIAM A. BRENNER, CPA CITRIN COOPERMAN Over the years I have seen many clients misclassify employees as independent contractors. In almost every case, the misclassification was due to a simple lack of knowledge and understanding of the differences between employees and independent contractors, as seen through the eyes of the IRS. On the surface it may not seem like a big deal, however, this is currently a hot topic with the IRS. Think about it from their perspective for a moment. You don’t withhold and remit income, Social Security, and Medicare taxes on payments made to independent contractors, thereby shifting the tax burden to the individual workers. This is certainly not a problem provided the individuals are truly independent contractors, but if the IRS determines that they are in fact employees, you, personally, could be on the hook for a substantial tax assessment. Many clients have said to me “I’ve been doing it this way for years and have never been questioned. Why change now?” Interesting point, but when you terminate a person who wanted to be, or whom you classified as, an “independent contractor,” what is the first thing he or she will do? They will run to the nearest unemployment office and file a claim. When the NYS Department of Labor notices that you haven’t included the individual on any of your payroll filings (and they will), hang on tight because the ride you are on will probably get a little bumpy. These cases tend to mushroom quickly, with the State asking questions about others that work in your company, and just so you know, the State typically sides with employees. It’s not just a matter of some payroll taxes. If these workers are determined to in fact be employees of the company or firm, they may be entitled to other employee benefits (health insurance, vacation, etc.), overtime pay, or even participation in the company pension plan.
My advice is to obtain an understanding of the factors that the IRS considers when making employee / independent contractor determinations, and then seriously consider the proper classification of your current independent contractors. Here are some of the key factors to be considered when making an employee / independent contractor determination: 1. The degree of control you have over the worker and the work being performed? The key factor is having the right of control, whether or not you exercise that right. 2. To what degree do you control the financial aspects of the relationship? In other words, who is in control of the finances of the worker? 3. Do you have a contract with the worker that defines the relationship as that of an independent contractor? While this is certainly a factor to be considered, the IRS will look to other factors that demonstrate the independent contractor relationship. 4. Do you provide tools, training, or employee benefits? 5. Is the working relationship expected to continue indefinitely? The good news is that it’s not too late to make changes and get a fresh start. The IRS currently has a Voluntary Worker Classification Settlement Program in place that provides taxpayers with the opportunity to come clean and begin treating independent contractors as employees. Are worries about the classification of your workers keeping you awake at night? Take action now and have a good night’s sleep. The next Citrin Cooperman Corner column will appear on this page Monday, September 10, 2012 dealing with how to control your company’s costs About the Author: William A. Brenner is a partner at Citrin Cooperman‘s White Plains office, where he provides consulting, tax and accounting services to business owners. Bill can be reached by phone at 914-949-2990 or via email at: wbrenner@citrincooperman. com. Citrin Cooperman is a fullservice accounting and business consulting firm.
A MESSAGE FROM CITRIN COOPERMAN FAIRFIELD COUNTY BUSINESS JOURNAL • Week of August 6, 2012
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