On Wall Street, firms increasingly focused on the creation, sale and trading of complex financial products. Bonuses and other compensation soared — the average almost doubling that of the nonfinancial sectors in the U.S. economy.
Midas touch with venture capital
As a venture capitalist, Dagres fulfilled a classic economic purpose, raising money from investors to bankroll entrepreneurs and incubate new firms. The rewards could be spectacular: In 2000, Dagres earned $44 million while a partner in a Boston venture capital firm, Battery Ventures. He had a network of knowledgeable sources in the booming tech sector and a keen eye for talent and a promising idea.
Dagres was an early investor in Twitter and struck gold with hot new firms such as Akamai Technologies and Qtera. In the Qtera deal, he later told the Tax Court, he made $800 million for his investors off a $15 million investment. He was listed on the Forbes “Midas” list of the top venture capitalists in America and branched off into the movie business as a producer of the films “Transsiberian” and “Pretty Persuasion.” The vanity license plate on his luxury Mercedes S55, the Boston Globe reported, read “VENCHA.”
The compensation plan at Battery was typical of private-equity firms. Dagres acted as a “general partner.” He would work his sources, spot an opportunity, conduct research and solicit money from wealthy clients, who came together as “limited partners” in a venture he managed and administered. Battery collected management fees, big enough to give Dagres a multimillion-dollar salary, but the big payoff came if the investment succeeded. Then Dagres and his firm would get 20 percent — the “carry” or “carried interest” — of the profits.
“It’s a performance-based business,” Dagres told the court, when his case came to trial in 2009. “If we perform well, we’re compensated well. If we don’t perform well, we’re not.”
The treatment of carried interest is a legacy of 20th-century partnership law, crafted with small businesses in mind in the years before the financial services industry became a behemoth. Today, it represents a loss of tax revenue. Closing the carried interest loophole would yield $20 billion during the next decade.
It saved Dagres hundreds of thousands of dollars. In his 2000 tax return, Dagres listed $40,579,415 in capital gains and $3.6 million in salary, interest and dividends. The Bush tax cuts, which cut the capital gains tax from 20 to 15 percent, had not yet taken effect, so his total effective tax rate was 21 percent — about that of a middle-class family.