Kate Mitchell was summoned earlier this month to represent venture capitalists at a U.S. Senate Finance Committee hearing on the carried interest legislation, a proposal that would raise taxes on private equity firms including venture capital firms. Carried interest is the amount -- usually 20 percent -- venture capitalists make on their funds' returns. For more than 30 years, that carry has been taxed at the capital gains rate instead of the higher income tax rate which this legislation intends to change. Mitchell, a managing director of Foster City-based Scale Venture Partners and a member of the National Venture Capital Association board, spoke with Business Journal reporter Lindsay Riddell.

Q: Why is carried interest taxed as a capital gain, rather than as ordinary income, and how did you try and get that point across to Congress?

A: The original intent of partnership tax law and capital gains tax treatment particularly, was focused on capital formation and company-building. I think carried interest fits perfectly within those two constructs. What we're trying to do is get cash out of people's mattresses and short-term savings and put it into capital formation, in our case startups in Silicon Valley but there are startups all across the U.S. Secondly we're trying to get people to leave safe businesses to join our companies. When you accept the job with us, you don't get a bonus to accept the position, you pay. The intent of the law was to encourage this kind of risk taking personally and with capital and people's careers and their money and that's the effect this is having and the reason for success venture has had.

Q: How important was it that in your responses to Congress that you differentiated venture capital from other forms of private equity?

A: The challenge is the second piece you mentioned: How do we differentiate ourselves from other asset classes? The partnership structure is broadly the same. Our initial objective is to defeat the Levin bill (Rep. Sander Levin, D-Mich.) because we don't think that's good tax law. And there are lots of unintended consequences with that. There have been discussions about how do you carve out venture? And I think that's a tricky matter. How do you differentiate between (what a mid-market buyout firm might do) and what we're doing as a venture fund?

Q: Were you surprised by any of the questions?

A: The thing that surprised me the most was senators made it perfectly clear out of the box, while they're concerned about abuses, they were in no rush and they really wanted to understand the issue. And I think that's good news for our industry here.

Q: In venture, very few firms talk about their failures. So what people see are the Googles and YouTubes and Yahoos -- and let's face it -- that have made many of you very wealthy. How do you argue against raising taxes on really rich people?

A: It's the tip of the iceberg that everybody sees. Those folks (the wealthy venture capitalists) have earned their right to be where they are, too. So go back to the examples, the Googles and the YouTubes and the Yahoos of the world. (Venture capitalists) created a lot of jobs in the process. People look at the wins and they don't realize it's a high-risk business and out of that, you have 40 percent losses, you have 40 percent of portfolios return capital over time and the remaining 20 percent are winners that really generate the capital gains. But you have to work through an entire portfolio before you know where you are. That's seven or eight or ten years. I think that's part of the message that gets diluted.

Q: Democratic presidential front-runners have at least come out to say that they believe "private equity" firms are receiving unfairly advantageous tax treatment. Does that hurt your case?

A: It's not clear what they're saying. All of us in the industry are trying to read the tea leaves. But they refer to venture capital as not wanting to kill the spirit of entrepreneurship. We don't know what that means.

Q: What changes might this have within the industry if this legislation goes through?

A: You'll see people push for different terms (with limited partners). Certainly early indications are limited partners want us to be aligned. They don't want us to make money on fees. They want us to make money on carried interest. They want us to be rewarded when we get there. I think what limited partners would be worried about, would be: Are funds going to either come back and ask for a work-around (like a non-recourse loan). Or (venture capitalists will) argue for more fees as opposed to the carry -- and that absolutely gets us out of alignment with our investors and the entrepreneurs. I think none of that is helpful to the industry.