Going all the way back to 1995, I’ve speculated that promising young people should be able to sell a claim against their future income stream. Back then, I called it the Personal IPO. The original idea came to me after rock star David Bowie sold the infamous “Bowie Bonds,” backed by the royalties from his music catalog.
I even blogged about this back in 2005, when I cited the example of my buddy Ramit Sethi. (Side note: If you had invested $50,000 in Ramit back in 2005, you’d be doing pretty well right now!)
15 years later, it’s finally happening. VentureBeat reports that the Stanford grad Kjersten Erickson’s Thrust Fund (I guess the name is a play on “Trust Fund” but will probably cause snickers nonetheless) is implementing my Personal IPO concept.
She’s selling a 6% stake in her future income for $600,000. That implies that the NPV of her lifetime income must be at least $10,000,000.
I love that the concept is finally getting a hearing, but fear that it will crash and burn because of mispricing.
A lifetime NPV of $10,000,000 is pretty rich…as much as we’d all like to believe that success is just around the corner, most of us would gladly take $10,000,000 in cash right now for all the money we’ll make in the future.
That being said, if someone is really interested in owning a piece of Chris Yeh, I’ll be happy to sell you a 1% stake for $1,000,000.
I'd be happy to invest $1,000,000 but I want participating preferred stock and a seat on your board of directors. 🙂
You can have a board seat, but it will be a 3-person board, with myself and my wife serving as the other members.
One wonders how this would work tax-wise, for both the "buyer" and the "seller".
Is the 10% before or after-tax? If she makes a lot of money in a given year, 10% before-tax could end up being something like 20%+ after-tax. But if it's after-tax, you've got an incentive to want her to live in a low-tax environment, so the value of the bond would vary with where she lives…
If I were the investor, I'd insist on pre-tax. That would eliminate location risk. For example, if you sold a bond, why not then move to Europe, where tax rates are higher, but social services plentiful?
I always liked your Personal IPO idea … thought it was pretty innovative and still do. It's the valuation people place on themselves that are a little much. Not that people can't rise above and do all the things they desire, but like in business, there are outside forces that control much of 'destiny'. Still it's an interesting concept I'd like to see more of.
Interesting Chris. I do recall discussing this topic in my securities class circa 1997, and I think a sticking point with this whole idea is enforceability, and the Thirteenth Amendment issues.
I think this arrangement is only workable if you really know the person and trust them, or you have very strong contracts on how the dividents are calculated.
For example if I was involved in such a plan, I might structure my compensation weighted heavily towards perks and benefits which I assume are not subject to the 6% dividend.
This is akin to the accusations that actors in Hollywood that are paid royalties are often stiffed of their just compensation because somehow the producers find a way to "lose money".
http://screencrave.com/2009-04-14/blockbusters-that-claim-to-lose-money-to-make-money/