Is it ethical for tech start-ups to take a CARES PPP loan?

There is a lot of debate about whether it is ethical for technology companies to take a CARES PPP loan. There are a lot of good arguments on both sides.

There are a lot of venture-backed start-ups that have over 12-months cash in the bank. The question is whether is it ethical for them to take this government money. The argument is that there is a limited pool of cash and that many local businesses are struggling and need the cash more than venture-backed start-ups.

This is a very complex ethical dilemma.

Before we get into that exactly … let’s dive first into the question of whether it is ethical to take government money at all if there is someone more needy than you.

One example is QSBS tax credit. That is a significant tax rebate that is given to investors who invest in a qualified small business (including most venture-backed businesses). It is an extremely generous credit and most of the people who take advantage of it are very rich people. Is it ethical for these people to take advantage of the QSBS tax credit?

I know people that refuse to take the QSBS deduction because they think it is unethical. These are very rare people (likely less than 1% of those that are eligible).

I also know people that do not think the tax credit is ethical but take it from the government and then give it to charity. Their reasoning is that they are better at allocating capital than the government so it is the ethical thing to do .

These are not easy ethical questions to answer.

We all have had that feeling after splurging on a luxury item and then realizing we could have given that money to people that really needed it. We stay at the Four Seasons instead of helping people in need. There are thousands on philosophy books written on this topic.

The vast majority of people do think it is ethical to take tax breaks legally. They feel that if Congress approves a tax break, they can take advantage of that tax incentive. That goes for QSBS (Section 1202), carried-interest tax breaks, ISO vs. NSO stock options, R&D tax credits, mortgage-interest deduction, roll-overs (Section 1045), San Francisco tax credits, and many more.

To many people there is a difference in taking advantage of a tax credit and taking the CARES PPP money. They feel that CARES PPP money is finite and is designated to help struggling businesses (like the local mechanic).

But all this money is coming from the same pool of capital (federal government). Taking a QSBS deduction inevitable means we will have less money to spend on CARES loans.

Yes, you can say you might have never invested in that start-up without the tax incentive (which may actually be true), but the ethical trade-off is the same.

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