MENLO PARK, CALIF., OCT. 1 -- At the Sundeck, a favorite lunch spot here for financiers who control much of the nation's $33 billion in venture capital, people might have been beaming today about the tax provisions included in the congressional budget package. But they weren't.
Instead, many venture capitalists and entrepreneurs in Silicon Valley were unhappy with Washington's budget compromise and uncertain about how well it would stimulate job growth of the type and proportions that can significantly bolster the country's competitiveness.
But while these and other backers of a full-blown capital gains tax cut criticize the accord as doing too little, most saw the package as at least one small step toward encouraging investment in small and medium-size companies.
Indeed, the tax package does promise several benefits for "small" entrepreneurial corporations -- those with equity of less than $50 million that are engaged in a trade or business.
The object is to make these companies more attractive to individual investors. For example, investors would receive a 25 percent deduction on the purchase price of stock in such companies, with a maximum deduction of $50,000 per year. The provision apparently will apply only to newly issued shares.
Also, individuals who hold their shares for five years would be taxed at a lower rate when they sell, provided the company had remained "small" at any point during the previous two years. Finally, stock held for at least a year would be indexed to eliminate taxes on increased gains due solely to inflation.
The companies themselves would benefit, too, from a one-year increase in the amount of deductions allowed for spending on research and experimentation and from a measure that allows certain equipment purchased by firms with assets of $50 million or less to be taken as an expense.
All this won praise from some. "From the small business perspective I think it's an extraordinary deal," said Allen Neece, a lobbyist for several small-business and venture-capital trade associations.
Some critics were worried, however, that the tax breaks would spawn creation of many companies with doubtful prospects solely to create tax savings for wealthy investors.
The measures may help attract individual investors who are willing to remain loyal to a start-up company during its early years, thus sheltering it from the "hot and cold" swings of Wall Street, said Gary Steele, president of a California biotechnology company that recently surpassed the $50 million mark in equity. For small firms, "it's been brutal to do financings," he said.
But venture capitalists and institutional investors, who see themselves as the real forces behind growth, said the measures just nibble around the edges of the investment problem.
For example, the 25 percent deduction, because it would be limited to individuals who invest only $200,000 a year and wouldn't benefit institutional investors in venture capital funds, likely would do little to spur capital-intensive high-technology companies -- firms like those in Silicon Valley that cost millions of dollars to start but have been huge job generators.
"I don't see it as a big benefit to the economy overall ... unless we feel we need a lot more dry cleaners and shoe repair shops," said venture capitalist Dave Marquardt.
Start-up companies may benefit indirectly, venture capitalists said, by being able to use the tax breaks as a lure to attract employees, who would be paid in part in stock. But many said the measures aren't enough.
"This is a politically nice thing to do and it's helpful for small companies," said Ken Oshman, a two-time entrepreneur who started Rolm Corp. "But my question is why did they stop with small companies... . I wish I could be more enthusiastic, but I think it's a narrow view."
Staff writer Stan Hinden contributed to this report.