Entries in Personal IPO (2)

Monday
Jan182010

Selling your personal equity: $300K now for 3% of your lifetime income

Three more high-achieving young people are taking themselves public in order to gain unrestricted cash infusions today. Kjersten Erickson, Saul Garlick, and Jon Gosier are the social entrepreneurs behind the Thrust Fund, an effort to raise money for each of their non-profit ventures by selling equity in themselves (rather than of course, their organizations). Like the earlier case we wrote about, Saul and John are valuing themselves at about $10M, asking for $300,000 today in exchange for 3% of their incomes for the rest of their lives. Kjersten is asking for $600,000 for 6% of her lifetime income.

This emerging and innovative model of selling personal equity raises a host of fascinating questions, likely most importantly, how to arrive at a valuation of an individual. The fact that all of the first movers in this space came to the same valuation of a round $10M makes the number seem a bit arbitrary. Perhaps the best example of a robust methodology to evaluate individual potential is that being used by People Capital, the peer-to-peer lending service for college loans that has created the Human Capital Index with MIT to determine loan terms for entering college freshmen. I don’t know what methodology the Thrust Fund used, but if this model takes off, over the long term it will be interesting to see how certain activities and characteristics can have a dollar figure attached to them. Exactly how much does that English degree from Harvard increase your personal value and how much more or less would you be worth to investors if you instead got an engineering degree from your local state university?

One of the main criticisms of this personal equity approach is that if investors were interested in your ideas or causes, then they should invest directly in them (where the value is more tangible) rather than in you (where valuation is so difficult). If a good methodology is developed, however, the personal investment might be even easier from the investor perspective. I believe that I can better evaluate the future success of the people that I know than the companies that they found. This approach may challenge the typical investor notion that talent, intelligence, and drive are not enough to determine the success of a venture, but there is probably a person out there who you know well and have full confidence that they will be extremely successful in the future. Even if his current project fails, that person is sure to come up with a killer concept later on. Better maybe to make the investment once and go along for the ride.

Which leads to my main problem with the Thrust Fund’s approach to this model: there is a conflation of the person and the project. Kjersten explains that she seeking to "mortgage her life in order to generate growth capital for her nonprofit organization". Besides being the height of work/life imbalance, this approach is not "investment in a person" but rather a donation to an organization with an independent promise from its leader. The $600,000 cash infusion is not an upfront investment in her to increase her earning potential later on. It may allow her non-profit to scale dramatically, but the investor is not sharing in that growth. It’s a creative way to raise money for a non-profit, but it doesn’t make much sense to me to send the entire investment into the working capital of a non-profit with no reason to suspect that act will make the individual heading it more valuable. These individuals are obviously all standouts in achievement and drive, but they are also committed to social causes, clearly not the path to high income. Saul writes, “"If we are given some freedom in the form of an upfront investment, who knows what we may go on to do. We may be working in non-profit space now, but a true entrepreneur never stops at his/her first enterprise. There will be others and it’s likely some will be for-profit." That would not be terribly reassuring to me as an investor.

By contrast, I have spoken with a young entrepreneur who says that he would likely take the deal because he figures the time that he would gain from being able to quit his day job now and focus full time on his startup will easily translate to a 3% income gain through the rest of his life. This calculation makes sense, much like a young aspiring lawyer accepting an investment to enable him to get an education necessary to making tons of money later on in life.

One thing that I do like is that the Trust Fund is sticking to a 1-to-1 model. The best implementation of this concept would seem to be a trusted mentor/mentee relationship. This is something that shouldn’t be crowdsourced, but rather a commitment by someone who believes in you and wants to make a concrete investment in your success. Which of course does raise the question of what the psychological pressure will be on Kjersten, Saul and Jon. Reciprocity is one of the strongest human instincts and these people signal a high degree of responsibility. How will entering into such an agreement impact your future life decisions? They are not required to provide a certain return of course, but will they feel a personal commitment to their investors? Does such an agreement make a person less likely to drop out of the workforce for a while to raise a family, for example? Maybe the buyout clause is the key to retaining a sufficient sense of freedom.

This is a bold move and I applaud all three of them for taking it. There is probably no greater signal they could send regarding their commitment to their respective organizations.

Friday
Nov062009

Investing in People, or the personal IPO

This guy has done what I've been hoping to see for a while: he's invested in a person, no strings attached, just based on a belief that she will do amazing things and wanting to share in the success:

Imagine you are in your early twenties, out of college several years and your best friend, who recently came into an inheritance of $300K cash told you they could think of no better way to invest the money than to invest it in you.  Not the company you started, not as a loan, but invest it in YOU, as if you were a startup.  In return your friend said all they wanted was 3% of your gross income for the rest of your life.  Do you think you would take it?

Now what if your friend said that they didn’t care what you did with the money or how much you made each year.  If you wanted to sit on a beach in Nicaragua learning to surf, go work in the Peace Corps, stay at home and do your art projects, whatever you want it would be fine, just as long as you made sure to always pay the 3% of whatever you make (as little as that may be).

And finally, what if your friend said you could buy out of your obligation at any point for $6 million in cash.  Then would you take the deal?

I've been intrigued by this concept ever since I learned about my former classmate, Randy Newsom, and his selling of shares of his future income as a professional baseball player. Randy is now in law school, the baseball dream over, and I don't know if the shares that he sold (4% of his future value) are now valid that he has chosen an alternative career, but what a smart way to raise a quick $50,000 as a minor league prospect.

[Alas, my attempt to buy the domain i.po failed. Poland is .pl not .po unfortunately]