The National Venture Capital Association (NVCA) announced Tuesday that it delivered letters signed by over 1,700 members of the entrepreneurial community to each U.S. Senator in hopes of raising awareness of potentially harmful legislation. The Senate is considering financial reforms that could eliminate capital gains tax incentives for venture capital carried interest, which the NVCA says could lead to a severe decline in VC investments.
Carried interest is a share of profits from a successful business partnership that is given to the manager of the fund, or in startup terms, money that is given to a VC or a firm when a company they invest in does well. Capital gains tax is a special lower income tax rate given to VCs based on these long-term investments.
“A change in venture capital carried interest will result in less venture investment in U.S. start-ups and fewer new jobs.”
– Mark Heesen, NVCA
In other words, as the laws stand now, VCs don’t have to pay full income tax rates on their carried interest from investments. If this new financial reform passes, VCs will no longer be given this special rate and will be forced to pay higher taxes – a situation many believe would directly lead to fewer investments.
As NVCA president Mark Heesen argues, this kind of legislation is in direct conflict with the government’s goals to turn the country around economically.
“As more than 1,700 VCs, entrepreneurs and concerned citizens will attest, a change in venture capital carried interest will result in less venture investment in U.S. start-ups and fewer new jobs. If venture capital investment disappears, there is no other asset class which will fill this void,” said Heesen in a press release Tuesday.
Tuesday, the NVCA delivered a document including a cover letter and 44 pages of signatures protesting the changes to the desks of each U.S. senator – 4,500 pages in all. Perhaps the sheer weight of the petitions themselves will have a lasting impact on the senators before they vote on the legislation.
According to the letter penned by Scale Venture Partners Managing Director and NVCA Chair Kate Mitchell, venture backed companies now account for 11% of the American workforce. Over half a million employees currently work at companies receiving venture funding. “These companies have added thousands of new positions each month throughout the recession and will continue to do so,” adds Mitchell.
With further regulations proposed by Senator Christopher Dodd, which would require angel investments to be approved by the SEC, the future of the VC industry could be in danger of being crippled by legislation. For a country that is hell-bent on job creation and reversing the financial downturn, it seems backwards to be limiting the very investments that have steadily produced job opportunities for years. Entrepreneurship is what founded this country and it is what continues to drive us into the future. Attempting to restrict and tax those that fund entrepreneurship is not likely to be a viable long term solution to our current woes.
Photo by Flickr user Kevin Burkett.
