One way to take a stand on carried interest: Give it away
While the debate over carried interest continues to retrace old steps, one venture capital fund is taking a stand on the tax loophole it benefits from by simply giving its carried interest profits to charity.
Rethink Education, a firm which which last year raised $40 million to invest in edtech startups, will donate a portion of future carried interest profits to NewSchools Venture Fund. It sounds like one VC giving money to another, but NewSchools is an investment fund structured as a non-profit. NewSchools has backed anything from charter schools and their management organizations to Khan Academy and a myriad of early stage edtech startups, including ClassDojo, GrokIt, and NoRedInk.
Historically, edtech has taken a disproportionately low piece of the venture capital pie. Between 1995 and 2011, education startups only received 1 percent of VC funding. That's quickly changing now, though. More than $1.1 billion in VC money was allocated to early stage education startups in 2012, Rethink said. And yet, as the sector heats up, it has managed to remain relatively underhyped, as Sarah noted in our edtech series last month. NewSchool focuses specifically on edtech that helps improve the lives of K-12 educators.
Rethink's managing partners Rich Segal and Matt Greenfield previously backed Schoolnet and Wireless Generation (sold respectively to Pearson and News Corp.) While carried interest is difficult to predict because it is based on selling companies are high valuations, the firm has roughly estimated the value of its carried interest donation could be worth as much as $100 million to $200 million over the eight-year course of its fund.
Rethink is not the first venture fund to commit its carried interest earnings to charity. Last year Andreessen Horowitz pledged to donate half of all income, including fees, carried interest and salaries to charity. Ben Horowitz told PandoDaily at the time, "We figured since a carry is taxed as capital gains and not income, we’d just correct that ourselves."
Carried interest is at the point where even people who benefit most from it think the loophole should be closed (not all of them, of course, but many). Whether the government manages to pass a law doing so is up for debate. And it will be debated, until the end of time, it appears. In the meantime, some firms are proactively eliminating the loophole themselves.