Felix Salmon

Siwoti Friday: Kwak fisks Langeler

By Felix Salmon
May 21, 2010

This is where the blogosphere comes into its own: Gerry Langeler, a venture capitalist, takes to Dealbook to try to defend the crazy way in which most of his income is taxed at the 15% capital gains rate. And then James Kwak reads his piece, comes down with an acute case of Siwoti, and delivers a textbook fisking of what passes for Langeler’s argument.

This might be the first point at which I’ve actually seen an MBA put to good use:

Langeler can’t tell the difference between a founder and an investor. To start off, what does it mean to say that founders are “leveraging our money”? The concept of leverage only applies to debt. VCs invest by buying convertible preferred shares, which are a form of equity, not debt.*** They are buying a share of the company, and they get all the upside on that share. That’s not leverage. Seen purely from the standpoint of the capital structure, VC investments dilute the founders. Granted, the company is getting something valuable — cash — in exchange for that dilution. But it’s giving up some of the upside. That’s the opposite of leverage.

There’s much, much more where that came from: go read the whole thing. It’s overwhelmingly probable that you agree with Kwak already: I have yet to find a non-VC who thinks that VC incomes should be taxed at 15%. But you’ll still learn a lot, both about the economics of financing startups, and about the art of putting together a great blog post.

4 comments so far | RSS Comments RSS

The really sad thing about this issue is not that people like Langeler are so off-the-charts greedy (lots of people will rationalize getting the biggest piece of pie), but that Congress is so inept and/or corrupt to let this happen. I know a lot of them don’t believe in taxes at all, but letting this small group of wealthy individuals, who make millions of dollars each year playing roulette (a lot of VCs have absolutely no clue what they are investing in) with other people’s money, pay half the tax rate, is just another example of how politicians really don’t care about anything but getting re-elected.

Posted by OnTheTimes | Report as abusive

“I have yet to find a non-VC who thinks that VC incomes should be taxed at 15%.”

A great deal of legislation is based on VC-like motives. This is what happens when we pay attention. While we weren’t paying attention, the Financial Sector ( they’re not alone in this, of course, since it’s the backbone of our current system ) was pushing little exemptions for themselves to get around onerous rules. I’m hoping that blogging can help avert some of this perk-specific legislation in the future. Admittedly, paying attention means paying the price of watching some rancid cookery.

Posted by DonthelibertDem | Report as abusive

Totally off topic, so feel free to kill this post, but does anyone else find this funny?:


“One early survey conducted in 1915 concluded that about 1 percent of its 1,000 subjects lied excessively. A study conducted in 1988 found that the average age of onset is 16, and 22 is the average age of discovery. A 2005 study published in the British Journal of Psychiatry found that pathological liars have more “white matter”—cells that carry signals to other parts of the brain—in their frontal cortex than other people. In other words, they’re especially good at thinking on their feet.”

Posted by DonthelibertDem | Report as abusive

when it comes to narcissistic self-regard, investments bankers, hedge fund managers, and VCs make the most cosseted, spoiled athletes look like boy and girl scouts.

Posted by howard7 | Report as abusive

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