8 ms·

Wanking is a good word for it. I've never understood how people looking for upside measured in the hundreds to thousands of percent can complain about a 3.8% ta

Wanking is a good word for it. I've never understood how people looking for upside measured in the hundreds to thousands of percent can complain about a 3.8% tax with a straight face. If you invest $100k in a startup, it goes well and you walk away with a million ($900k profit), are you really going to cry when the tax man comes and gets his $34,200? I guess you might, but it didn't suddenly make the investment not worth it. Then again, those people aren't likely the ones complaining. It's the people who have a hypothetical model in their head of what "investors" are like and want to use it as a talking point to attack health care reform.

pfedor 17y ago
Let me start by saying that I am not opposed to the proposed healthcare reform, since I don't know enough about it to have any opinion, and I suspect that if I did invest the time and learned the facts I would be in favor of the reform. With this out of the way, your argument seems completely wrong to me. In reality nobody can consistently get 1000% returns, or anywhere near it, from the startups they invest in. (If that was possible, everyone would want to invest in startups and the valuations would go up until the returns got more in line with other investment vehicles with the same risk profile.) In reality, for every startup where you invested $100k and walked away with $1M, there are many where you invested $100k and walked away with zero. On average the returns can't be much different from what you get elsewhere, I'm guessing I won't be off by much if I say 10% before tax and before inflation. And 4% difference in tax burden will also mean about the same it means for other investments, which is to say it's not insignificant. Think of the lenghts people go to in order to put a little more money in a tax sheltered part of their portfolios. Or, think of the risks many people with stock options grants took to convert their short term capital gains into long term (and many of them got burnt very badly when the dot com bubble burst).
- Xichekolas 17y ago
  I totally agree with you in aggregate. If you take the entirety of the VC/Angel scene and figure out the overall return, it's probably not that much different than other investment vehicles (it's probably a bit higher, since there are barriers to entry, which prevents everyone from getting into the game). But my point was for those upper echelon's of VC/Angels who actually make money. PG has pointed out in the past that there really are only a handful of VC/Angels that actually consistently make money (and more importantly in the case of VCs make money for their investors). You're right that my case was idealized, but investment losses can also be used to offset gains for tax purposes, and this is an industry of lawyers, so I doubt the tax effects are as clear cut as either of us paints them to be. And I still maintain my overall point that 3.8% isn't going to suddenly kill the startup scene. If it was that tax sensitive, it wouldn't be in California to begin with.
glifshitz 17y ago
Good point. However you forget that those who make $1m in profit also know how to raise a stink, how to call their congressman, how to post a letter on the Internet. Just see how much debate there is around the estate tax issue. It affects very few but there is a lot of hoopla around it. That is because it affects lots of rich people.
lrm242 17y ago
Assuming a 15% long term cap gains rate you'd write a check for $135k. You now have 765k--not bad, but how many years did it take? Now, what if the tax rate was 34% (as will be in a few years under this plan in CA): you write a check for $306k and you're left with 594k. If this exist took you three years you just averaged a 200k/year salary--great job. Unfortunately, you'd have been better off working for Cisco because of the amount of risk you likely took to achieve that outcome. Anything that the government does to minimize the reward for taking risk will, undoubtedly, also minimize the amount of innovation. Please save this and come back and read it after you write a check (one or multiple) to the US government for millions of dollars after you struggle for 5+ years and literally risk everything you have to make a business successful.

pfedor 17y ago

Let me start by saying that I am not opposed to the proposed healthcare reform, since I don't know enough about it to have any opinion, and I suspect that if I did invest the time and learned the facts I would be in favor of the reform. With this out of the way, your argument seems completely wrong to me. In reality nobody can consistently get 1000% returns, or anywhere near it, from the startups they invest in. (If that was possible, everyone would want to invest in startups and the valuations would go up until the returns got more in line with other investment vehicles with the same risk profile.) In reality, for every startup where you invested $100k and walked away with $1M, there are many where you invested $100k and walked away with zero. On average the returns can't be much different from what you get elsewhere, I'm guessing I won't be off by much if I say 10% before tax and before inflation. And 4% difference in tax burden will also mean about the same it means for other investments, which is to say it's not insignificant. Think of the lenghts people go to in order to put a little more money in a tax sheltered part of their portfolios. Or, think of the risks many people with stock options grants took to convert their short term capital gains into long term (and many of them got burnt very badly when the dot com bubble burst).

Xichekolas 17y ago
I totally agree with you in aggregate. If you take the entirety of the VC/Angel scene and figure out the overall return, it's probably not that much different than other investment vehicles (it's probably a bit higher, since there are barriers to entry, which prevents everyone from getting into the game). But my point was for those upper echelon's of VC/Angels who actually make money. PG has pointed out in the past that there really are only a handful of VC/Angels that actually consistently make money (and more importantly in the case of VCs make money for their investors). You're right that my case was idealized, but investment losses can also be used to offset gains for tax purposes, and this is an industry of lawyers, so I doubt the tax effects are as clear cut as either of us paints them to be. And I still maintain my overall point that 3.8% isn't going to suddenly kill the startup scene. If it was that tax sensitive, it wouldn't be in California to begin with.

glifshitz 17y ago

Good point. However you forget that those who make $1m in profit also know how to raise a stink, how to call their congressman, how to post a letter on the Internet. Just see how much debate there is around the estate tax issue. It affects very few but there is a lot of hoopla around it. That is because it affects lots of rich people.

lrm242 17y ago

Assuming a 15% long term cap gains rate you'd write a check for $135k. You now have 765k--not bad, but how many years did it take? Now, what if the tax rate was 34% (as will be in a few years under this plan in CA): you write a check for $306k and you're left with 594k. If this exist took you three years you just averaged a 200k/year salary--great job. Unfortunately, you'd have been better off working for Cisco because of the amount of risk you likely took to achieve that outcome. Anything that the government does to minimize the reward for taking risk will, undoubtedly, also minimize the amount of innovation. Please save this and come back and read it after you write a check (one or multiple) to the US government for millions of dollars after you struggle for 5+ years and literally risk everything you have to make a business successful.