Equity investing in superstar individuals (not their companies, them)
emergentfool.com
emergentfool.com
At an abstract level there's some appeal to this notion.
At a practical level not so much, though, and that's even before you get into the nitty-gritty mechanics (like tax law here lol).
The adverse selection risk is huge, unless you go for very young people. What this means is that for people who're already "established" and/or have a track record:
- if they have a worthwhile idea they won't have trouble getting better, cheaper funding than this
- ergo if they're asking you for this kind of funding:
-- they either blew through their previous earnings and don't have a concrete idea to pursue next (NOT GOOD!)
-- or they aren't actually that "established" / lack a track record, and therefore are actually exactly the kind of people you don't want to invest in like this
...so pretty much investing in people proven-successful won't be happening.
We can roll back and consider younger people -- those too young to have any great success to there name yet -- and now there's some possibility here: catching brilliant people on the way up and giving them a further hand up.
Your problem here is that:
- you're competing with student loans as a choice of funding; for a student to pick your investment over a student loan it has to be a better offer. For any student that anticipates serious success you'll have a hard time being a better offer in terms of net payout; student loans are painful b/c their payback is frontloaded into the postgraduation years, which are at the point of the lowest lifetime earnings potential...but in net amount 3% of lifetime earnings will be much greater than the total amount of student loan payments.
- most of the really talented individuals won't even need your money, as there's an unbelievable wealth of grants and scholarships and fellowships for the truly exceptional in all walks of life (science, music, athletics, etc.) that they pretty much don't need funding until after they graduate. After graduation they might take you up on the offer but as time passes they become ever-more-likely to be able to raise cheaper funding for whatever they desire
...so even going after the young'ins leaves you unlikely to be attracting the people you'd want to invest in.
Which means good luck: even if you had the money together if you extend the offer at a price that'll leave you likely to turn a profit it's unlikely to be compelling to anyone you'd want to invest in.
And if that doesn't dissuade you think about the tax law implications: given how easy it would be to do an end-run around inheritance + gift-tax law with this type of "investment" -- and that that this end-run route isn't being taken 24/7, etc. -- I can guarantee you the recipient of this "investment" is going to be taxed on it as income (or at even worse rates, perhaps)...which means the math for the recipient is even worse:
- your investee now has to decide if, say, 125k or so (about what'll be left out of a 250k investment after taxes) is worth 3% a year
...which further contributes to the adverse selection issue as you're only really offering half as much as you think you are.
If it were that easy people would already be getting around gift tax and estate tax by investing $millions in their kids in exchange for .01% of future annual income, initial payments deferred 15 years (and transferring as part of the estate) and and so on.
- most of the really talented individuals won't even need your money, as there's an unbelievable wealth of grants and scholarships and fellowships for the truly exceptional in all walks of life (science, music, athletics, etc.) that they pretty much don't need funding until after they graduate. After graduation they might take you up on the offer but as time passes they become ever-more-likely to be able to raise cheaper funding for whatever they desire
You're making the assumption that the person would choose to use the money on schooling. Student loans come with that terrible string attached. This investment would not.
Keep in mind that I'm already ruling out people with substantial established track records of prior accomplishment, leaving you with:
- people mid 30s or older without any kind of track record to speak of (UNLIKELY TO BE A GOOD INVESTMENT!)
- kids in the 18-25 y/o bracket, eg old enough to sign a contract but not-yet with a track record
So if we have someone 18-25 with a tangible track record (eg: successful software / website / invention / artistic performance record / etc.) they're out of the picture; we're left with 18-25 y/o's with promise but nothing else.
In most fields it's not impossible to pull off a huge success without the training acquired in at least an undergraduate program but it's very unlikely in most scientific fields (and if you were the type who could do it you'd probably also already have enough of a tangible track record that you'd not really be part of the group we're considering atm anyways).
EG: you're almost certainly not going to do anything significant in biology or medicine or chemistry or engineering or materials science or semiconductors or optoelectronics (and even football and basketball) without the training usually acquired as an undergrad (let alone in grad school).
So yeah: the money not being tied to college would have its appeal but putting on the investor's hat for a second someone without a plan for acquiring that level of training looks like a bad bet unless there are further mitigating factors.
Which is why I think the assumption is still mostly warranted, even if it shouldn't be taken for granted (as it was in my previous response).
But, what is helpful is this points in the direction of selecting candidates who would benefit from this program: musicians and other artists.
In many musical + artistic genres a couple hundred upfront in exchange for a cut of lifetime earnings is much better than the deal they typically get now. There's not necessarily a ton of fledgling artists out there who'd actually be good investments but it's a niche where the offer may make a fair amount of sense from both sides.
Essentially you should be asking: what potentially-highly-remunerative "career paths" are (a) open to people in their early-mid 20s and (b) such that star talents exist and (c) such that star talents would find this type of investing a better option than their existing funding options.
Perhaps this is a direct consequence of the lack of alternative funding? Our society is structured in such a way that you're expected to be doing one of two things at all times: work or school. If you choose to spend time exploring the world in your own way, you're seen as wasting your time and given no support by anyone. As a consequence, this is rarely a feasible choice.
Opportunities such as these are extraordinarily rare, but we have essentially no modern data on how people who have such opportunities fare.
That said, we do have historical data: virtually all academic progress (scientific, philosophical, etc.) has historically been made by the aristocracy -- by people who could spend their time "being idle", neither working nor schooling, and think about big problems.
This is the same reason there's no "alternate funding" for bright but undistinguished 45-y/o people with no prior background in materials science to go and do materials science (short of education loans for late-life career changers); it's a field that requires lots of education (in the sense of learning) and specialized skills and someone without those skills isn't likely to accomplish anything on the investment.
Generally yes: advances come when you pair motivation to investigate topics of interest with freedom from more-mundane considerations and access to the necessary resources to make advances (idleness, if you will); as the frontiers of most applied sciences have gotten out of the reach of what wealthy dilettantes can easily afford you don't see them making many advances (but you do see plenty of advances in industry and academia, still, both of which allow their researchers enough of those things to make advances and both of which -- unlike most wealthy individuals -- can afford the tools many times over again).
Please note that I was careful to say that the prospective 18 y/o outsider materials scientist (or what have you) needed the training usually acquired in a university context; I deliberately did not say that they needed a university education.
It seems that for most bright-and-motivated types they could easily accelerate that training substantially if they had more freedom to choose courses a-la-carte; the loans-for-college approach currently doesn't allow for that kind of discretion, but a more financially-secure student would be better-placed to negotiate that.
All that being said: there's almost no way that someone without the equivalent of that kind of training in an applied science will make material contributions to that field; at present economic constraints make it very hard to obtain even the equivalent of that training short of actually going to school and getting a degree (at which entails putting up with all the bs and time-wasting stuff that that entails).
The downside case is much better with the "3% equity in a person" investment than a student loan.
If true it'd only further contribute to the adverse selection effect: the ability to easily shuck the obligation will do more to draw out people you don't want to invest in than to ring in superstars who otherwise might say no.
My taxes to the government are more of an exchange of services. My government gives me roads to drive on, schools to send my kids to, police, fire department, parks, regulation of various industries, labor laws, military protection from hostile governments (among other things including the potential betterment and presumed increased safety of society).
To wit, my taxes are my end of a tacit social contract that I have made with my government. Because it is a social contract, the purpose of it is not profit, but instead the betterment of mankind in general.
When you compare the benefit received by paying taxes to the benefit of a lump sum payment (which could be had just as easily in the form of a loan), you realize how little you are getting from this investment plan.
But I think that my specific revulsion comes from having read plenty of literature (Shakespearian and pre) and knowing that usury is a sin.
Taxes are forced on us, not chosen. They do support some betterment of mankind, but the inefficiency is bad for mankind. Taxes are an order of magnitude higher, and the individual benefits are usually far less.
Loans are paid back plus interest on a fixed schedule. These aren't. Most investees will profit from the transaction even without TVOM.
Don't like lump sums? Just convert it to guaranteed monthly income for life by buying an annuity. Rates are low right now due to the economy, but you'll still get ~$2k/mo for a $400k lump sum.. and you can get things like inflation adjustment too.
"You'll never be poor" is usually worth more than "a few percent of your income" plus the right to buy it back.
Taxes are indeed forced upon us, but you benefit directly from the system that taxes support. If you do not want to pay taxes, you always have the option to leave the safety of the system (move to another country or declare war on the country taxing you).
Although it is likely infeasible and anti-social to declare war (however, it has been done many times), I don't doubt you could find a country with lower taxes. The issue, however, would then be being able to make the same amount of money as you would in a country with higher taxes. That is to say, you get what you pay for.
Essentially you are discounting (wholesale!) the benefits that you, the individual, derive from having a working system of government. Yes, the immediate and obvious benefits are small, but the benefits that you essentially take for granted, certainly are not small.
I think the quote that life would be "nasty, brutish, and short".
I did the math prior to posting and I do realize that (depending on the sum of money), it could be a very good deal for the investee.
It just seems to have elements of a Faustian bargain.
Yeah, not a great choice of words on my part. Using descriptions of taxes, loans, and usury in the explanation of what disturbed you about this investment deal seems at least close to the definition of analogy though.
The issue, however, would then be being able to make the same amount of money as you would in a country with higher taxes. That is to say, you get what you pay for.
That seems unlikely. I'd get the exact same benefits in this country if I'd paid <10% of the taxes I already have.
If you have enough money to do this and seek to invest, I would highly recommend going after academically successful but poor kids. They are the ones who are most likely to drop out of university or go to a community college instead because student debt is too scary for them. That is because their belief about likely future income is based on people they know, which is far out of whack with what educated people can make. But their life choices are likely to leave them at what they expect.
At a practical level this means that you have room to structure the deal so you get better average returns than a loan, they are better off after accepting your deal than they would be if they don't go to university, and they are better off than they would have been if they earn what they think reasonable. Everyone wins.
If Matt Maroon gets in to this thread, I'm sure he has some interesting war stories about poker guys getting big stacks of money into bizarre schemes.
The main difference between is the open-ended nature of this contract. 3% for the rest of your life? Honestly, I don't think "Marge" is a very good negotiator. But that's why athletes have agents.
Since these contracts don't impinge on personal freedom, they should be legal. And I dare say that any number of highly motivated and intelligent people would jump at an opportunity like this (myself included), especially with the buy-out clause.
I'd also look at something like Intellectual Ventures, except on a longer term, where smart people are paid to attend the sessions to generate as many new, useful ideas as possible.
If someone was willing to pay me $300K cash so that I could work on my passions rather than having to work a day job I'd be more than happy to give them a return on their investment, rather than looking for ways to get out of my obligations to them.
The lifetime contract is an interesting spin. Kind of reminds me of a classical artist having a patron. It's a great deal from the perspective of the individual...3% is always a trivial amount of your income. I do worry about it from the investment perspective...it seems way too easy to let personal biases and an individual's charisma get in the way of making rational investment decisions. While most investments are made on the basis of "I really like this person", it probably isn't the best criteria.
After twittering about this, someone (possibly half-joking) offered to invest $60 USD in me under similiar conditions. Transaction costs and overhead however make these small investments really unattractive.
Is it completely crazy to propose a website that allowed me to combine lots of small PICs, and handling the overhead, to get my life as a project financed?
From that wikipedia page: " An indentured servant is a laborer under contract to an employer for a fixed period of time,[...], in exchange for their transportation, food, clothing, lodging and other necessities. "
Here you are paying a fixed sum of money that they can use for whatever they want (instead of the minimum necessities like food and clothing) and you are not the employer, the person can work on anything they like as long as they pay back the dividend.
I don't see what makes the two cases similar. In one case you pay the minimum so they work for you. In the other you pay some amount so they can work whatever they want but you get a percentage of that.
If you do this investment and the person takes out a life insurance policy on themselves, and they die, do you get 3% of the life insurance policy?
Although, I dunno, isn't this what having children is for?
You pay upkeep on them until maturity and when you are old and senile they pay to put you in a home and have you fed applesauce or whatever.
http://deadpeasantinsurance.com/which-employers-bought-polic... has a list of companies that did this.
Not if the insurance company has a say in this. They will raise premiums for bad working conditions.