Why you should care
Because banking on your future salary could help you avoid credit card debt or loans — but it could also cost you even more in the long run.
Some investors bet on stocks, gold or even bitcoins. Others bet on 20-somethings like Shane Gring, who sold himself on the market for $12,000 to pay down credit card debt and get help launching a business. In exchange, Gring now pays the backers 2.3 percent of his annual salary — and he’ll end up doing so for about a decade. “I would have preferred to have a shorter term and higher payback monthly,” Gring tells OZY.
No kidding. Call ’em what you want — human capital contracts, income-sharing agreements or income-contingent loans. They are not new and sometimes they work out well: Early on, in a well-documented example, famed boxer Muhammad Ali traded a share of his future winnings to a syndicate of backers who paid for his training. Tournament poker players are also regularly staked by investors, which gives hard-luck players on a losing streak the chance to play on.
When the deals are handled right, they can potentially support a new generation and allow some of the more seasoned investors to offer mentoring.
But when it’s not handled right, there might be another name for all this: indentured servitude. Indeed, it’s not hard to argue that today’s deals, which are more sophisticated, may take advantage of struggling students and desperate, job-scouring grads who would give almost anything for some cash to, say, cover tuition and rent, start a business or become a filmmaker. That’s especially true if that means giving up a slice of their future earnings in an economy that has been particularly difficult on kids trying to enter the workforce.
Saul Garlick, a Denver entrepreneur, considered being a human investee himself several years ago when he wanted to start his social enterprise ThinkImpact. Yet he found that the valuation model was “very complicated” when it came to calculating someone’s earning potential. “There are easier ways to raise capital,” says Garlick, who ended up going to angel investors instead.
Of course, not everyone has that choice. On the plus side, the deals do typically let grads wait until they have a job before they start their monthly payments. Some companies also make sure they earn a minimum level of income to ensure they can afford the terms. There’s a larger benefit when the deals are handled right, in potentially supporting a new generation and allowing some of the more seasoned investors to offer mentoring.
Yet there’s a slippery slope here. Some people don’t mind sharing their annual tax return to prove they’re paying investors back as much as they should be each year. But with payback rates as high as 15 percent on the money they received from investors, they may end up shelling out way more over their lifetime than they would have through a traditional bank or credit card company. “It’s not for everybody,” says Brian Norton, CEO of Future Finance Loan Corp., which works closely with CareerConcept, a company that has linked about 2,200 students to various investors.
Two firms, Palo Alto–based Upstart and New York–based Pave, got some attention when they rolled out these types of agreements a couple of years ago. But since then, they’ve pulled back and have started to offer more traditional loans. The reason? In part because only accredited (see: rich) investors have been able to back willing participants, and “while many regulatory and policy efforts are underway to facilitate the development of the market, these efforts will likely take many years — a timeframe ill-suited for a startup like ours,” Upstart CEO Dave Girouard writes on his company’s blog.
Just don’t bet that this idea will die anytime soon. Oren Bass, Pave’s co-founder, tells OZY that he’s hopeful future legislation might crack open this market by letting companies like his tap into larger, so-called institutional — not just individual — investors. We’re OK with that — just don’t cross the line between good business and exploitation.
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