Entrepreneurs offer their life’s future earnings for an investment

http://deals.venturebeat.com/2010/03/03/life-investment/

by MotorMouths • 16 years ago

21 28 16 years ago

deals.venturebeat.com

morisy2• 16 years ago

This particular execution - a lump sum of $600k for a lifetime's earning percentage of a successful non-profit entrepreneur - seems absolutely insane to me, but I've wondered about a similar arrangement under more narrowly contrived circumstances: Invest in promising (18 and over!) students by paying off their school for percentage of their salary, rather than dumping huge loans on them that demonstrably reduce their opportunities.

Right now, the armed forces in America regularly engage in a similar practice by paying for school in return for a commitment, and maybe their agreements could provide a model for a more entrepreneurial version down the road: We'll invest in your education plus a start-up stipend, in return for a stake in you and your projects during college + x years after, with a clause that you can leave at any anytime and assume your debt with a high level of interest.

dantheman3• 16 years ago

You can leave at anytime by not working.

morisy2• 16 years ago

That's definitely another way :)

OmniLarry2• 16 years ago

Sounds kind of like the public school system (not including university) and taxes.

HeyLaughingBoy• 16 years ago

The version of this that I've seen work is the "Northern Exposure" one (remember that TV show?).

I had a friend whose MS in Nursing was paid for by a state government and in exchange she had to agree to work for a number of years (I think 3) at a hospital in a low-income neighborhood that was having trouble attracting good nurses. Yes, she was paid, etc! It worked out great since she got a free education and found out that she enjoyed working with that particular population and the state had one more highly qualified nurse on its roster.

Win-win incentives like these have a fighting chance, "opportunities" that are heavily weighted in one party's favor tend to not do so well.

dantheman3• 16 years ago

These types of schemes are not even worth discussing, they're horrible for investors, and if the first venture doesn't work then does the investor buy more of the person? So that their their initial investment isn't lost? At want point does the person having sold 80% of their future earnings just stop working because they don't see it as worthwhile.

rewind• 16 years ago

Anything is worth discussing if both parties see the benefit. The "not even worth discussing" mentality would have stopped a lot of successful businesses and individuals if that's the attitude they took at the beginning.

dantheman3• 16 years ago

I chose my words poorly, I should have said this has been attempted before and I don't see any difference in this persons plan, except that they seem even less likely than those who proposed this earlier to make a lot of money, and I don't think anything in the world has changed that will make this a workable solution.

mortenjorck• 16 years ago

I'm not trying to discount you with a strawman here (you make a good point), but I'd take issue with the idea that "anything is worth discussing if both parties see the benefit." Here goes my extreme example: Child prostitution. The child makes money to pay for living expenses, the customer relieves his sexual tension. But no one would argue that, despite the benefits to both parties, the downsides of this arrangement vastly outweigh the benefits.

Again, I'm not trying to make a strawman here comparing this investment scheme to child exploitation. But while this scheme may indeed be north of "not even worth discussing," the idea of "selling off" any part of your life is not something to be taken lightly, which I imagine you'd probably agree with.

dustingetz3• 16 years ago

I think the financial pressure of bootstrapping is such a powerful motivator that I dunno if giving an unproven entrepreneur 600k is such a good idea.

OmniLarry2• 16 years ago

So to break even, she will have to make 10 mil$, not doing the math on opportunity cost, taxes, etc. Sounds dubious.

dustingetz3• 16 years ago

an entrepreneur making 10mil lifetime? a reasonably bright kid could prob make half just by climbing the corporate ladder.

mattm2• 16 years ago

I feel sorry for the people trying to do this. They will be in debt forever. You only understand the downsides of debt once you make an effort to get out of it. These people will never be able to do that.

The graduate student is signing a part of her future income away in her 20s before she has even earned income.

dustingetz3• 16 years ago

it's financially brilliant from the kid's perspective, assuming she is successful. she gets a 5-year head start in business. compound that head start all the way to retirement, and its surely worth more than she paid.

http://www.paulgraham.com/equity.html

mattm2• 16 years ago

There's a lot of assumptions that need to go correctly for this agreement to work. In my experience, assumptions like this rarely work out.

It's very dangerous to enter into an agreement where you are assuming that things will go well. If your assumptions don't pan out, you will be in big trouble.

She shouldn't just look at the upsides but also the downsides. If things don't work out, does the person really want to be paying 6% of their meager retirement income when she's 80?

I think it's pointless to even plan more than 6 months ahead as priorities and situations change. I cannot imagine entering into an agreement for a lifetime.

Money is a very psychological thing. There's a big reason why people get paid after they have delivered work and not before.

A graduate student in her 20s does not have the experience to see all the potential downsides of an agreement like this. That is what makes it dangerous.

og1• 16 years ago

I still trying to figure out what agreement is. Is this the same as someone investing in a company for equity? Where lifetime is the time the company is in business (but without bankruptcy)? Or is it just a really bad non-fixed rate loan? I would not agree to this contract on either side though.

tbgvi• 16 years ago

Can an investor in this situation force someone to work? Can they sell their share of a particular worker to another investor? Sounds like something we abolished a while back...

goodside• 16 years ago

No. Yes. Problem solved.

brezina• 16 years ago

Anyone with experience in funding a company through equity financing would never put their personal equity into an agreement like this. And I wouldn't fund someone who is as fiscally irresponsible with their personal finances.

Companies are much bigger than the entrepreneurs that start them. Say this woman sells 6% of her earnings to get $600k for her C corp. The C corp could literally turn around and fire her with very little consequence (except maybe some stock acceleration and severance). Then what? She has traded 6% of her future earnings and she doesn't even have a job at the company she started and limited upside in the venture she started. Super risky.

This is why we have corporations. To separate personal and corporate responsibility. Doing something like they are suggesting is as crazy as repealing the separation of church & state.

bravura• 16 years ago

Interesting, I always thought of the separation between personal and corporate responsibility in just one direction. Could you elaborate?

Mankhool• 16 years ago

Life imitates art. Has anyone else read The Unincorporated Man by Dani and Eytan Kollin?

"A brilliant industrialist named Justin Cord awakes from a 300-year cryonic suspension into a world that has accepted an extreme form of market capitalism. It's a world in which humans themselves have become incorporated and most people no longer own a majority of themselves."

aresant2• 16 years ago

MyRichUncle attempted this at scale a few years back.

They built a cool algorithm to predict your future earnings, nd let people invest in you in exchange for a portion of your future earnings.

They quickly realized that this doesn't scale, and while they garnered a lot of attention thanks to the novelty of the idea, the business failed.

In a stroke of brilliance they leveraged their brand value into using MyRichUncle as a student-loan portal, and then after growing astoundingly fast, were nearly jailed for fraud and collusion with a handful of other scumbag student loan predators, and ultimately crashed and burned.

jackowayed2• 16 years ago

I've thought about a similar idea, but a college.

What if someone founded a college that instead of making people go deep into debt, took, less than 1% of their earnings forever.

It could end up attracting a lot of people planning to be homemakers, or at least those planning to get lower-paying jobs like teaching, but it definitely has potential.

An added bonus would be differentiation/branding. Colleges that aren't near the upper echelon go to a lot of effort just to seem special and get potential students to remember who they are because really they're all more-or-less the same. Having something as unique and appealing-sounding as "we're free! ... in a sense" would make sure that people remember them.

aresant2• 16 years ago

Isn't that what PG set up with Y-Combinator ;-) ?

jackowayed2• 16 years ago

Heh, not quite.

This would be a normal college and thus would be able to take people who want to go into any field.

The more I think about this the more I think it has potential. All kinds of interesting things could be products of it. For example, the career services department (or whatever they call the unit that helps people find jobs after they graduate) might be substantially better than at most colleges because it's seen as an investment, not just a nice, but nonessential, way to help their students out.

nlwhittemore• 16 years ago

So I moderated this conversation last night and there are a couple of important elements to keep in mind.

1. This is actually happening. Rafe Furst, who is the investor who first put this into action, has actually made this sort of investment in at least 2 (and maybe more now) people. So it's jumping off the page.

2. The Thrust Fund model that this article discusses and that Kjerstin (the girl in question) is working on is slightly different, in that it is more heavily focused on social sector organizations, where the "gain" for investors is even more complex then just making a new type of financial bet.

3. The reason this is coming up for mission related ventures is that there is simply less funding available for social (vs. web) startups, the costs of building a successful organization are often higher, and frankly, the entrepreneurial class is just at an entirely different place than the foundation class that has traditionally been in charge of funding nonprofit ventures.

4. What came out of the conversation last night is that this is not a type of investment that someone would make for a purely financially strategic reason, although Rafe would argue that it's extremely financially strategic in that you get a piece of a rockstar's success, wherever that success comes from.

Instead, most investors that I've seen interested in this (and a couple made commitments on the spot last night) are thinking about this as a new way to combine mentorship and investment.

johnl• 16 years ago

Sounds lame, way too many variables. You could hedge the downsize with life insurance I guess. YC has a much better model. .

Entrepreneurs offer their life’s future earnings for an investment

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