Is It As Risky As It Seems? a Short Note on How Tax Policy Impacts Informal Venture Capital Investing (Manuscripts‪)‬

ABSTRACT The purpose of this study is to answer the question, "are informal venture capital investors rational?" If angel investing is rational, then it should have a competitive rate of return (adjusted for risk, liquidity, and investment efforts) compared to more passive market-based investments such as index fund investing. If these adjusted rates of return are not competitive and do not compensate for the additional costs of informal venture investing, then the nonfinancial motives must be the most important criteria driving informal venture capital investments. The following analysis illustrates how tax policy can be used to make seemingly economically irrational informal venture investments an economically rational decision.