So I happened to see that a company called Fantex has signed up another professional athlete. Fantex is a site that pays athletes upfront for a percentage of their future earnings. That asset is then securitized and sold as a stock to ordinary people. Here is an article that talks about the process.
As the article notes, the wisdom if this as an investment remains to be seen, but the concept is pretty interesting to me. Do you think this will pave the way for ordinary, yet promising people to get money to pay for college loans or to pay for college itself? I can imagine some chemical engineering grad offering a percentage of their future earnings in exchange for someone paying for their student loans. One day, investors may look for underpriced valedictorians looking to major in finance.
Given that companies already buy unprofitable startups for the the human capital at the company, is the day that far away that people are routinely selling pieces of themselves on the stock market?
I like the concept. Imagine how many superstars in business, technology or industry never got their start for lack of resources. It will be interesting.
I’d question the principle behind it. The Bowie bonds weren’t really based on future work - they were backed by the future earnings for work Bowie had already produced.
That’s different than investing in somebody who is just starting out in the hopes that they will have go on to produce income-earning work. That’s really difficult to predict. Let’s face it: we already have a huge entertainment industry that’s geared to finding new talent and they miss at least as often as they hit. Predicting who’ll be a major star in ten years is pretty much a crap shoot.
The other problem is metaphorical hunger. A strong element driving people to become successful is the need for recognition and reward. People fight their way to the top so they can reap the benefits at the peak. But if you had given these people some of those benefits back at the start, how would it have effected their ambition? They might have become too comfortable and been surpassed by more driven people who hadn’t been rewarded yet.
Thats a valid arguement. Some people are self motivated by passion and others by money. A person motivated by passion for something when given the resources to pursue his passion can be a powerful force. When I retired from work with a steady income I find myself pursuing things now with my more fervor than I often did when I was young and struggling.
IIRC from the little legal training I’ve had, there are limits to the lengths of contracts – 7 years is a pretty common limit. You might be able to cash in on a superstar athlete in 7 years, but for most professions, probably not. And with the athlete, there is significant chance of a career ending injury that could happen at any time, including the day after you make your investment.
Well, it depends on the success threshold you have. There is a better than average chance that a guy graduating in the top 10% of his class at Harvard Law or business school will make millions of dollars over the course of his career. Yes, if you are looking for this person to become a billionaire, you might be out of luck, but their success is almost assured. If the stock was priced right, I think the risk is fairly minimal.
If the market was efficient, you would see risk accurately reflected in the price. So the price to invest in that same guy as a high school senior, a Ivy undergrad, and then as an MBA grad would increase as his success became more a reality.
True, but you could theoretically always buy back your own stock. That would be a motivator as well. Additionally, if the money were used to fund your education beforehand, you might feel more comfortable picking a more expensive school that would yield income high enough to offset the future income you have signed away. So someone might feel it’s not worth being a doctor if they have to put their life on hold until they’re 30-something. But, signing away say, 20% of your income for free med school might be worth it if you become a radiologist instead of a general scientist.
Yeah, investing in athletes (especially football players) seems too risky for my liking.
That’s a terrible idea unless you plan on being underemployed for the rest of your life. if you plan on being successful, presumable a percentage of your lifetime earnings would be significantly greater than the interest and principle on your school loans.
Your loans are certainly going to be SOME percentage of your lifetime earnings, so your objection makes no sense. More importantly, you are forgetting that you can invest the money you would save not paying off loans. The issue is more about if an efficient market can price the things well enough to make it attractive to buyers and sellers.
But the person who’s paying you is also an investor. He’s not giving you money to pay off your loans out of the goodness of his heart - he’s doing it as an investment and he is looking to maximize his profit. And being as he’s a professional investor and you’re a new graduate whose field may not even been related to finance, he’s almost certainly better at investing than you are. So if he’s offering to pay off your loans now in exchange for a future return on your earnings that’s the equivalent of a 150% return, then you should not assume you can accept his money and then go off and invest your money in something that will earn you a 151% return - if such an investment was readily available, the investor would have put his money into that instead of offering you the money.
Not necessarily. Student loan interest rates are often higher than the return an investor can get on safe investments, so the investor upside need not come at the student’s expense, but rather the bank. Additionally, the money you would be potentially saving is the difference between a student loan payment and your future income you sold off. You don’t need to be better than the initial investors in order to make it work, you just need to be better than the loan deal you would have taken.
Most importantly though, you will always hypothetically be able to beat the market because you will always have inside information on how good an investment you are day to day. So in the Fantex example, Arian Foster knows how good a value he is just based on the fact that he largely controls his own destiny.
You are also missing the point that many students can increase their earning potential if they had money for (for example) a great school instead of having to go to a middling school. It’s not like everyone has access to resources to fund their education to their heart’s content.
Let’s say I am a lower middle class kid wanting to go to an expensive grad school. I may not be able to get enough loans, grants, etc. to go. If my second choice would on average result in 10% less lifetime income, it makes perfect sense to sell off <10% of my future income for tuition money. Just like it does for people to give up equity in their startup for cash. The concept is really not much different except that the startup is a person in this case.
I’m not sure at what point you’re talking about making an investment. Are you saying somebody should agree to invest in a promising high school graduate who’s planning on going to law school? Or a law school graduate who’s just passed his bar exam and is looking for a firm to join? Both are decent prospects but the risks are obviously different.
And more to the point the debt situation is probably different as well. The high school graduate probably has no significant debt but he’s looking at his law school tuition. A traditional college loan would loan him the money for college to be paid back after he graduates with interest. An personal investment contract like we’re discussing would offer him money now (presumably an amount large enough for his college education) in exchange for a percent of his future income.
Let’s say that with the bank loan, he’ll graduate with $100,000 of debt that he had to pay off in ten years. The personal investment is offering to pay him his college money in exchange for say ten percent of his future earnings. Let’s estimate his expected lifetime earnings at four million dollars over a period of thirty years.
Looking at those numbers, why would he prefer to sign up with you? Yes, he’ll be paying the bank when he graduates but he’ll pay the bank less than he’ll pay you, even taking the longer period into account. And the bank loan is a fixed amount. With you, if he’s successful he pays you more money. The only way he’ll come out ahead is if his “insider knowledge” is that he’s not as smart as he appears. Maybe he knows he won’t be a very good lawyer and will earn much less than the four million you expect him to make. The only way he can “win” is if he bets on himself to fail.
You could, of course, offer better terms but you’re approaching the point where this is a bad investment. You’d be better off just offering regular loans like the banks does.
The problem in this scenario is everyone appears to be fairly intelligent. Nobody is going to do something stupid or short-sighted. You’re all smart enough to look at the long-term picture. The only way an investment like this would work is if you’re dealing with somebody who doesn’t consider the long-term consequences. That’s probably why these investments are being offered to athletes. Athletes are often not noted for their financial intelligence. Many of them would probably be impressed by an offer of $1,000,000 cash now without considering how much they’ll end up paying for it in the next few years.
On the other hand, would insurance the athlete takes out in case of injury count as earnings? I’m sure it depends how these contracts for “athletes as investments” are written.
The NCAA has a program now where college athletes can get insurance against career-ending injuries that is borrowed against future earnings and only payable once a player makes the pros. Many pro players also can take out policies to get something in the event of a bad injury though I think choice of underwriters is pretty limited.
As the article states, athletes as investments seems like a pretty high risk or even dumb investment.
As for Arian Foster, he’s an NFL player where the contracts aren’t guaranteed and wouldn’t ya know it he went down with a back injury.
This would work better in a league with guaranteed contracts and for a player still on a rookie contract. Someone like say… Tony Parker who was on a rookie minimum contract (~1 mil/year) for 4 seasons before he signed a long-term (~10 mil/year) contract when the rookie contract ran out. But then again, it stops being an investment but rather a personal intermediate loan with absurd interest rates. I just don’t think it’s a good/viable idea for athletes. It get to be an even more raw deal for students.
My late law school professor used to say he would work for 0.01% of the earnings of his students over their lifetime. He figured he could retire after 12 years of teaching. If every teacher we ever had got 0.01% of our lifetime earnings, it would probably cost us 2% or 3% of our income and every teacher in America would be a millionaire.
That was different. I worked on that deal and it was a securitization of royalties. At the time, the income from the royalties were much higher than the debt service on the securities and the royalties seemed to have a track record that indicated a stable income stream. The security only paid a few percent more than teasuries of similar duration.
Everything you say here is equally true of an institution offering you a loan for your education. They’re not giving you money out of the good of their hearts. They expect to make a profit, etc.
The difference between getting a loan and selling a percentage of your future income is in what happens when you deviate from expected earnings. Consider the following cases:
You earn less than expected. In this case, you’re way better off selling personal stock. Your payments are less. If you’re not earning anything, you don’t have to pay anything.
You earn what’s expected. Assuming that the markets are efficient, you should pay exactly the same amount under both repayment systems.
You earn more than expected. In this case, you’re better of taking the loan. You’re going to pay more than average back with stock. However, you’re also doing better than you expected, so maybe that doesn’t matter as much.
Effectively, selling personal stock lets you trade some benefit in the best case to insulate yourself from risk in the worst case. Given how loss-averse humans are, this is a deal that many people would be happy to take.
However, it’s not quite that simple. Because the other thing that selling stock does is incentivize you to underearn. After all, the downside is now smaller. Someone who gets loans to go to medical school and comes out owing $250k and maybe not wanting to be a doctor is likely going to be a doctor anyway, because how else do you pay that back? If they sold stock, there’s much less incentive to be a doctor, since they’re paying a percentage of what they actually earn. If they want to be a poet, they’ll net a bit less than the poets who didn’t get their medical degrees, but in absolute terms, that’s not a huge difference.
Good thing he wasn’t a math or economics professor. US public education spending is already 5+% of GDP (that’s not even counting private universities), and teachers are not millionaires. I find it hard to believe that we could somehow spend a smaller percentage of our national earnings and end up with wealthier teachers to boot.
This is like those flat tax proposals that claim we can all pay just 7% in taxes and get a higher level of government services (apparently by magic). Average college tuition to a private college is $100k+. Even if we assume that every dime goes directly to teacher’s salaries, for the 3% figure, that would have to mean that the average lifetime earning of someone with a bachelor’s degree is $3 million+ (in real dollars), which it isn’t.
Good points. With regular corporate stock, if the company is underperforming, you can vote for a change in management to get the company performing again.
It seems that there used to be a concept in US law providing for equity ownership of people that did carry decision-making authority. It was called