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Looking at it in hindsight it looks like a giveaway, but since most startup investments fail and return absolutely nothing, this just changes the odds to make i

Looking at it in hindsight it looks like a giveaway, but since most startup investments fail and return absolutely nothing, this just changes the odds to make investing in startups less risky. There would be much less startup capital around and people would just buy mutual funds in mega corps if it wasn't for this tax break.

ruggeri 5y ago
I upvoted you and would agree that encouraging creativity, new enterprise formation and investment in new ideas are all positives that the policy is chasing. I think this policy is not a very effective means to that end. QSBS does not reduce the probability of startup failure. You can increase the financial rewards of startup success, but at a certain point this becomes less-and-less effective, because of risk aversion, and because of the declining utility of money. This is why I say it is a give-away. Because in most cases it won't change the calculus of starting/investing in a startup from "not worth it" to "worth it." It just changes how rich the founder/investors are in the case that the startup succeeds. I reflect on my own experience: the existence or non-existence of QSBS did not and would not have any bearing on starting my own business. This is of course N=1, so take it with a grain of salt. I would just conclude by saying: QSBS is not a give-away only if it changing behavior. I'm not sure I believe that it actually changes startup or investing behavior. I will grant that my experience is as a founder, and not an investor. It's more plausible that investors, who can diversify their investments, would have their behavior affected by QSBS. QSBS changes expected value of investment, though I have no idea how much early-stage investors can calculate that. I also don't subscribe to the theory that more investment entails more creativity and innovation. I suppose that's a founder-biased point of view.

ruggeri 5y ago

I upvoted you and would agree that encouraging creativity, new enterprise formation and investment in new ideas are all positives that the policy is chasing. I think this policy is not a very effective means to that end. QSBS does not reduce the probability of startup failure. You can increase the financial rewards of startup success, but at a certain point this becomes less-and-less effective, because of risk aversion, and because of the declining utility of money. This is why I say it is a give-away. Because in most cases it won't change the calculus of starting/investing in a startup from "not worth it" to "worth it." It just changes how rich the founder/investors are in the case that the startup succeeds. I reflect on my own experience: the existence or non-existence of QSBS did not and would not have any bearing on starting my own business. This is of course N=1, so take it with a grain of salt. I would just conclude by saying: QSBS is not a give-away only if it changing behavior. I'm not sure I believe that it actually changes startup or investing behavior. I will grant that my experience is as a founder, and not an investor. It's more plausible that investors, who can diversify their investments, would have their behavior affected by QSBS. QSBS changes expected value of investment, though I have no idea how much early-stage investors can calculate that. I also don't subscribe to the theory that more investment entails more creativity and innovation. I suppose that's a founder-biased point of view.