Proposal: Syarikat Berisiko Tinggi Berhad (BT Bhd)

I don't want to spend too long on this note as the motivation for writing it comes out of nowhere at a busy time. I just happened to chance upon two articles today, an interview with a former leader of a government agency helping startups, and a recommendation by a business operator and executive.

The video interview was a reminder that labour markets are freer in the US than in Malaysia, and the textual recommendation carried a bit of comic relief by suggesting that taxpayer funds should not be used lightly, while also suggesting that coupled with founder-guarantees, and revenue-multiple-limits, up to 70% of loans to struggling startups should be borne by the federal government.

My initial thought was:

70% federal loan for sector with 90-99% failure rate is extravagant. Instead, government could focus on making the regulatory environment more frictionless for private individuals and corporations to invest equity or debt in high risk startups. There should furthermore be a new corporate entity type managed by Companies Commission called "Berhad Mikro" with relaxed Employment Act compliance and other legal exemptions. This makes the entire asset class easier to manage with agility - it needs to be demarcated, explicitly with high risk, but with greater market freedoms. All of this should be parked under the Securities Commission's purview.

Following which, some private banter resulted in this nut:

BesFren : But Malaysia is too conservative for that.
Me : 90-99% failure rate. The risk should be on the label. This is where you go to die. This is where your money goes to die. This is where your career goes to die.
BesFren : But who would want to join these companies?
Me : THIS IS ESSENTIALLY WHAT STARTUPS ARE.

In any event, within a few minutes, I decided I should flesh out the proposal a bit more before putting it down and getting back to real work.

---

Perhaps it is not just the notion of a Berisiko Tinggi Berhad which should be formalised, but the entire startup lifecycle. The earlier the stage, the more liberal the regulations should be.

For example:

Syarikat Berisiko Tinggi Berhad (BT Bhd.)

All stages:

• Good citizenship
• Every BT Bhd to receive a case officer from the Securities Commission (or another agency). Case officers to manage fortnightly supervision of 20 startups each.
• Standardised term sheets
• Every BT Bhd financing round to be officially regulated, through a formal process, with standardised term sheets. There can be various mutations of term sheets of course, the same way that McDonalds innovates on burgers, but there shouldn't be the freedom for everyone to simply pen their own. New varieties on offer every six months, ok?
• Things like convertible debt need to be locked down and made the same for everyone who uses this vehicle (it's just a temporary vehicle, if you don't like it, move on!)
• Investment Incentives
• All capital injected as equity by private individuals or companies, to the BT Bhd, should be tax deductible up to a specific quantum, with a multiplier for further sweetening at early stages of funding.
• All capital injected as debt by private individuals or companies, to the BT Bhd, should qualify the lender for an interest-discounted backing loan from the central bank.
• Deregulated Sandboxing
• Explicit exemption by act of law, to allow BT Bhd companies to be subject to a very small subset of regulatory compliance requirements. 
• Employment Act requirements are an obvious subject of discussion - as the act is written, it already incentivises clever employers AND staff to always sign freelance contracts  to circumvent it.
• Foreign Worker / Working Tourism opportunities are another obvious subject of discussion.
• I mean, we could really go on and on here... about how the rules that were written to regulate large listed corporations in Malaysia are also the ones which hamper innovation and agility for new business owners who just want to test new markets.
• Mandatory Up-or-out Lifecycle 
• The point of the BT Bhd is to encourage risk capital to move. Incentives to move such capital should be sustained only by some quantitative milestone, and otherwise retired.
• If a BT Bhd hits milestones, it should formally be allowed to be reclassified to the next stage, or it must convert itself to a non-BT Bhd entity such as a Sdn Bhd,  PLT, or sole-proprietorship (of course, there needs to be a manual for this).

Staged limits:

1. Angel stage
1. Maximum paid-up capital of RM 20,000, including both debt and equity.
1. Equity contributed in cash by investors, reduces taxable income to investors by a multiplier of 1.5x. If you put RM 10,000 in as equity here, you get a RM 15,000 reduction in your taxable income for the fiscal year. 
1. There is already no capital-gains tax in Malaysia for the most part - can't do much there.
2.  Debt contributed by investors should qualify 100% for a 0% backing loan from Bank Negara.
2. Maximum of eight (8) shareholders, including ...
1. ... a maximum of four (4) corporate bodies,
2. ... a minimum of two (2) operating shareholders, 
3. ... a minimum of one (1) external director, possibly the case officer from the regulatory agency.
3. Maximum lifetime of 12 months. After which, it must have passed the following milestones, or be decommission as a BT Bhd (the details of implementation for monitoring, warnings, appeals, and enforcement are left as an exercise to the reader):
1. Some sort of revenue hurdle, say RM35,000.
2. Some sort of traction or personal data collection hurdle, explicitly converging with PDPA requirements, say 35,000 sign-ups.
3. Some sort of investment hurdle, say RM50,000 in equity,
4. Other hurdles - oh, go talk to a venture capitalist, I'm sure they'd be happy to enlighten us.
2. Pre-seed stage
1. Maximum paid-up capital of RM 200,000, including both debt and equity.
1. Equity contributed in cash by investors, reduces taxable income to investors by a multiplier of 1.3x. If you put RM 100,000 in as equity here, you get a RM 130,000 reduction in your taxable income for the fiscal year. 
2.  Debt contributed by investors should qualify 90% for a MAX( BLR-minus-3%, 0) backing loan from Bank Negara.
2. Maximum of 20 shareholders, including ...
1. ... a maximum of 10 corporate bodies,
2. ... a minimum of two (2) operating shareholders, 
3. ... a minimum of two (2) external directors, possibly including the case officer from the regulatory agency.
3. Maximum lifetime of 24 months. After which, it must have passed the following milestones, or be decommission as a BT Bhd (the details of implementation for monitoring, warnings, appeals, and enforcement are left as an exercise to the reader):
1. Some sort of revenue hurdle, say RM200,000 within a 12 month period.
2. Some sort of traction or personal data collection hurdle, explicitly converging with PDPA requirements, say 200,000 sign-ups.
3. Some sort of investment hurdle, say RM500,000 in equity,
4. Etc.
3. Seed stage
1. Maximum paid-up capital of RM 2,000,000, including both debt and equity.
1. Equity contributed in cash by investors, reduces taxable income to investors by a multiplier of 1x. If you put RM 1,000,000 in as equity here, you get a RM 1,000,000 reduction in your taxable income for the fiscal year. 
2.  Debt contributed by investors should qualify 75% for a MAX( BLR-minus-2%, 0) backing loan from Bank Negara.
2. Maximum of 50 shareholders, including ...
1. ... a maximum of 20 corporate bodies,
2. ... a minimum of three (3) operating shareholders, 
3. ... a minimum of two (2) external directors, possibly including the case officer from the regulatory agency.
3. Maximum lifetime of 24 months. After which, it must have passed the following milestones, or be decommission as a BT Bhd (the details of implementation for monitoring, warnings, appeals, and enforcement are left as an exercise to the reader):
1. Some sort of revenue hurdle, say RM1,000,000 within a 12 month period.
2. Some sort of traction or personal data collection hurdle, explicitly converging with PDPA requirements, say 1,000,000 sign-ups.
3. Some sort of investment hurdle, say RM3,000,000 in equity,
4. Etc.
4. Series A
5. Series B
6. Etc.

So from this sketchy draft, we see a few possibilities:

• A nimble startup might punch through angel and pre-seed stages within a few months, and continue on in the program until it was basically a medium-sized company. 
• As a BT Bhd, the later stages could involve regulatory requirements and investment opportunities customised for different genres or types of SME. Some SMEs are operating at a loss, but raising lots of money to gain traction, others are profitable but subject to specific regulatory exemptions, etc.
• A weak startup might take up to five years (1+2+2) to be kicked out of the program, or it might be able to just make it and graduate upwards to later stages.

Etc.

I'll just leave this here - I think it's a sufficiently detailed note that captures the intuition I had about this.