The Carried Interest Tax Debate (continued)

First, I want to thank Bill, Steve and Hey for the excellent debate they carried (no pun intended) on in public in the comments section of my post this morning.

Second, I want to implore Hey to stop posting anonymously. His writing is too good, his opinions are too strong, and his voice is too valuable to go on anonymously. I’ve been getting comments from Hey for years and I’ve always felt that he needs to come clean.

Third, I want to be very clear about my position on founders’ sweat equity versus limited partnership carried interest. We have worked very hard in many of our investments to structure them so that the founders can get basis in their founders stock and qualify for capital gains treatment. It’s not that hard to do. The other people’s money (OPM) doesn’t usually show up in a startup until the company has been formed and the founder has bought (often for a nominal amount) the founders’ stock. At that point, the founder has already or is in the process of taking the capital risk that establishes the basis for long term capital gain.

What I don’t buy is the argument that the venture capitalist is doing the same thing as the founder. The founder takes the risk at the start and then uses OPM to fund the business going forward. And the founder does not take a share of the profits on the OPM.

My friend and college buddy Mike Feinstein, himself a VC, waded into this debate today with a post on his blog. Mike argues for proceeding with any change cautiously. Always a good suggestion when you are tinkering with an incredibly successful model.

I think I’ve said my piece on this topic and will now move on to something more interesting, like can the Mets continue their winning ways against the Redbirds this week. Now there’s a topic that should bring out some real passion.