The Human Stock Market: Betting on People, Not Products
The economics and ethics of turning lives into financial instruments
It’s 1997 and Reid Hoffman, a 30-year-old with two degrees (one from Stanford and another one from Oxford) is starting a new company. SocialNet.com is one of the first social media platforms, connecting people based on their shared interests. The Stanford grad, who has been pretty senior at Apple and Fujitsu, is keen to explore how tech can facilitate social interactions.
Impressed by his CV and determination, there are a few venture capitalists who want to invest in him — and by extension, his company. Their names are St Paul VC, Accel Partners, and Primedia Ventures.
But by 2000, he’s burnt through $22 million in funding without a whole lot of success. Hoffman leaves his own company and goes to help build Paypal alongside Elon Musk and Peter Thiel.
Yet, by December 2002, he’s ready to get back in the social media game. Drawing upon his time leading SocialNet.com, he leverages his experiences, contacts and insights to envision a professional networking site. This time, he calls it LinkedIn.
And when LinkedIn raised its first round of funding, Hoffman's original backers (St Paul, Accel and Primedia) either don’t want to, or can’t invest.
Fourteen years later, LinkedIn was sold to Microsoft for a record $26.2 billion, and two of his first believers, St Paul and Primedia, had been insolvent for years.
St Paul VC and Primedia might have thought they were investing in Reid Hoffman, but their insolvency says otherwise: Hoffman is a billionaire, while they never returned their fund.
Venture capitalists simply can't buy shares in people. But what if they could?
That Time a Blackstone Associate Sold Shares in Herself and then Founded a Five Billion Dollar Startup From the Proceeds
Actually, they can. Amid the high-rises of New York's financial district, 29-year-old Trina Spear was working in private equity at the Blackstone Group. It was 2013, and she was secretly harbouring entrepreneurial ambitions. However, shackled by $200K in student debt from her Harvard MBA, there was no way she could service her monthly loan repayments, afford rent in New York and pursue the financially-precarious realm of startups.
That was, until she stumbled across Upstart — a platform that offered ambitious and high-achieving young people upfront capital, in exchange for shares in their future earnings. It used an algorithmic model that analysed a range of factors, including education and work history, to connect young professionals with accredited investors willing to bet on their success in exchange for a share of their future income.
With the aid of Upstart, she secured a crucial $20,000 investment from 13 backers in exchange for 1% of her pre-tax income for the next decade. With this, she could service her loans for the next twelve months. She quit Blackstone and founded FIGS Scrubs—a company aiming to revamp the medical apparel market.
In 2021, her startup floated on the NYSE for a staggering $4.6 billion.
All thanks to the 13 investors who coughed up $20K almost a decade earlier. Yes, Spear had succeeded, but so had they; with 1% ownership in her income, it was quite the payday for them too.
Upstart was one of the first to pursue and scale this people-as-shares economic model, treating career potential as a market commodity. It was envisioned by ex-Google executive Dave Girouard. In 2014, he said,
“At Google, when we were hiring people … we were very data-driven and algorithm-driven in terms of predicting likely success at Google, and it struck me that if you could predict someone’s success at Google, you could also use an algorithm to predict their likely success in the wider economy,”
Upstart’s algorithm looked at your college, major, academic record, standardised tests results and work experience. From this, it predicted a range of future earnings and their likelihoods. Once approved, people could put their profile on the site, including notable facts about themselves (Spear's was that she had a photographic memory) and could sell up to 7% of their earnings over either the next five years, or the next ten years, whichever suited them better.
Investors' returns were capped at 3x over the 5-year-period, or 5x over the 10-year-period (which means that Spear’s investors didn’t quite rake in tens of millions). Their contracts were also dynamic—pausing payments if income dropped below a set threshold and extending the payback period accordingly.
Investors, compelled by both the promise of returns and the allure of nurturing the next big innovator, found these human-centric investments to be more than just transactions. It was this melding of finance and human potential that made Trina Spear’s — and many others' — journey possible.
Sadly, Upstart pivoted its business model in mid-2014. It went from income share agreements to a more traditional lending approach. Girouard said at the time,
“While many regulatory and policy efforts are underway to facilitate the development of the market, these efforts will likely take many years—a time frame ill-suited for a startup like ours.”
That was almost ten years ago. And folks, it looks like that time has finally arrived.
Libermans: Bet on the Builders, Not the Building
David & Daniil Liberman are brothers. This is their story: they were born in post-Berlin Wall Moscow in a crowded family apartment. As teenagers they built an algorithm designed to forecast the underground composition of land parcels—a concept with potential utility in identifying oil reserves. The Russian Federal Security Service (F.S.B.) found their work in subsurface exploration, and tried to recruit them for dark hacking. They declined.
Post university, the Liberman Brothers started a video game company. After raising millions of dollars and hiring 200 people, it collapsed in the aftermath of the GFC. Undeterred, they created a successful political satire show in their home country, which ran for a few seasons. Then, they built a nonprofit financial transparency platform and that failed too.
Their luck turned with their next startup — this one in augmented reality — called Kernel AR. Snap (makers of Snapchat) acquired it in 2016, and renamed it to Bitmoji. If you're under 25, you've probably used it. Now they're running a whole lot of startups, including Product Science, which plants flags to help engineers accelerate app run times.
But what's most interesting is this: in the last year or so, David & Daniil Liberman started selling their future. Investors have valued that future at $400 million, and the Libermans have sold about 3% of it.
The brothers, along with their two sisters, created Libermans Co, a holding company incorporated in Delaware. It has their current rights, titles, interests, and major intellectual property, as well as all their startups, private-market investments and sales, salaries, bonuses, commissions, and equity in the next thirty years.
They are currently working with the S.E.C. in the hope that they will be able to list themselves on the stock market. Right now, they're subject to double taxation. The hope is that with regulatory approval, that won't be an issue anymore.
Their investors include Long Journey Ventures' Partner, Arielle Zuckerberg, (sister of Mark, the Facebook co-founder), as well as Sam Lessin, a Partner at Slow Ventures. Slow Ventures, once a traditional VC firm, now has a group of employees committed to finding and investing in ambitious human lives.
95% of one of those lives belongs to Marina Mogilko, a language learning Youtuber and co-founder of the platform LinguaTrip. Slow have taken the other 5% in exchange for $1.7 million. They get 5% of her earnings over the next 30 years, and, crucially, 5% of any intellectual property she develops during that time. As she explains, “If I wrote a book in 2030, and it’s still selling in 100 years or whatever, they’re still getting 5% of that revenue.”
The idea is gaining the most traction in the creator economy. Companies like Spotter and Jellysmack will underwrite YouTubers' back catalogue in exchange for a nice parcel of cash upfront. Spotter has already signed deals with MrBeast, Dude Perfect and Like Nastya (a 9-year-old with 110 million YouTube subscribers).
This is big. And this is happening.
It's not limited to the creator economy either. A few years ago, we had promising athletes who were IPO'ing themselves so they could afford the training and equipment they needed to go pro. And it was facilitated by traditional banks — these transactions were underwritten by the investment bank, UBS.
Fantex: The Athlete IPO
Imagine it's 1996. You're a wealthy investor and you stumble across a 14-year-old tennis prodigy. His name is Roger Federer, and he comes from a relatively middle-class family. His parents are making many, many sacrifices — financial and otherwise, to get him the training and the equipment he needs. After all, the boy shows a lot of promise.
What if you offered the family a considerable upfront lump-sum payment that would get him the training & resources he needs now, in exchange for a percentage of his career earnings? Sure, it's a gamble, but he could win grand slams …
This was exactly the idea behind Fantex, a startup that emerged in 2013. The platform allowed investors to buy and trade shares linked to the earnings of future athletes. They provided a lump-sum payment in exchange for a stake in their future earnings, including endorsements and other related income streams. Investors could then speculate on the athletes' success by buying and trading shares in these earnings.
Not only were they speculating on the future, they were actually influencing the future. With upfront capital, these athletes could then invest in premium training, premium equipment, and premium medical care. They could thereby improve their performance, improve their income, and improve the dividends paid to investors.
Win-win-win.
Over the span of a few years, Fantex signed twenty professional athletes, and launched several so-called 'Athlete IPOs'. One of these was with Alshon Jeffery, an NFL player who had been a wide receiver for the Chicago Bears for three seasons. In March 2015, he IPO'd via Fantex at a valuation of $8.4 million. The deal was SEC and FINRA approved, and underwritten by UBS.
It had a pretty considerable ROI. According to Spotrac, he signed a 1-year, $14.6 M deal in 2016 with the Chicago Bears, a 1-year, $9.5 M deal in 2017 with the Philadelphia Eagles, and a four-year, $52 M contract with the Philadelphia Eagles in 2018. Anyone with shares in Alshon Jeffery, the stock, received this income from Alshon Jeffery, the person.
For Fantex, despite initial enthusiasm, its business model became unsustainable. Jeffery was a success, yes, but other players' stocks tanked when they could no longer play due to injury or poor performance. In 2017 the company ceased the trading platform and wound down its business activities.
I Have Thoughts
Alright, we've run through a lot of case studies here. Let's jump to the analysis now. A few things I want to cover:
When you value a company, you consider its growth prospects, not its balance sheet. With a person, we simply tote up their cash, assets and debts at a point in time, and call that their value. This is narrow minded and limiting.
The ambitious need a financial instrument that captures upside, not one that mitigates risk and limits downside. This is equity, not debt.
People outlive companies. Stop worrying about key person risk, and start worrying about key company risk. Look at Reid Hoffman. The average age of an S&P 500 company today is just over 20 years — and that ignores the slew of failed startup attempts that came before. Entrepreneurs tend to have careers far longer than the absolute best case scenario 20-year corporate lifespan.
With high-risk investment, you need a diverse portfolio so you can diversify away risk. I think this is one of the reasons why Upstart (Trina Spear's platform) and Fantex (the Athlete IPO one) failed. And it’s why Slow Ventures will succeed.
This all feels a bit dystopian, doesn't it?
How Do You Measure a Life?
The inspiration behind this month-long frenzy of research, the culmination of the article you're now reading, stemmed from a casual conversation I had with a few uni mates over a drink at Howard Smith Wharves. We were discussing the challenge I, as a 21-year-old without a stable income or assets, would face in obtaining a relatively modest loan and the exorbitant interest rates associated.
It struck me that as an individual, getting financial support proves much harder compared to the treatment a company might receive, despite us all essentially functioning as financial entities in our own right.
As at time of writing, Amazon has a price-to-earnings ratio hovering around 73x. This means that investors are paying $73 for every $1 of the company's earnings, indicating high expectations for future growth. The market believes Amazon will continue to expand and increase its profitability, justifying the premium price of its shares.
People, on the other hand, are valued on their collective post-tax earnings, and equity interests. Taylor Swift recently became a billionaire at a net worth of $1.1 billion, but if she was a company, if she was Amazon, we would also be thinking about all her future music and how valuable that will be, and the earnings and royalties she will undoubtedly earn over the decades to come.
And I’m worth a secondhand Kia Cerato and a bit of savings.
Of course, there are enormous error bars attached to any kind of income prediction model you create. But the same can be said for all startups that attract VC funding. When funding the ambitious, equity makes much more sense than debt.
In a New Yorker article published late last year, journalist Nathan Heller discusses this concept. He writes that,
"There are also inequalities that extend longitudinally, from the past into the future. Your young self does labor for which your older self collects rewards. Such timing issues—how much money you receive or can spend now and later—have effects on your financial fate. In a more equal world, you cannot help but think, people would draw on their lifetime wealth throughout their lives, not merely at the pinnacle of their careers."
Consider the case of a young Federer. Had his family been unwilling or unable to make the financial sacrifices they did, it's plausible he would not have ended up where he is now. It is also very possible that there are many pro footballers or prodigy golfers that are unable to pursue their talent due to financial constraints.
The potential wealth they could unlock in the future remains trapped there, preventing them from borrowing from their future selves, and that wealth is never realised, in present or in future.
In finance, we learn about the Modigliani-Miller theorem — this idea that, in a perfect market, a company’s value will be the same whether it finances its growth through equity (selling shares) or through debt (taking on loans). And then we learn that, in a non-perfect market, debt is even better than equity, due to the interest shield.
Two reasons that doesn't apply here: (1) the unproven & the ambitious either aren't always eligible for loans, or can't service their interest rate, (2) debt is psychologically onerous, and encourages risk aversion — not ideal for the ambitious.
The Libermans' story is exciting and non-linear because this is how the ambitious live and work. Most founders don't drop out of college and start a billion-dollar company on their first go. Some people are born to build things, and some of their experiments fail, while others become generational companies.
We spoke about Reid Hoffman earlier, but consider Travis Kalanick. He dropped out of UCLA to create Scour, a peer-to-peer content-sharing service. It scaled, but then went bankrupt over a copyright infringement lawsuit. Less than a year later, he founded a new file-sharing service called Red Swoosh, and that was acquired for $19 million. And then he founded Uber.
Some of his previous investors wanted in, some did not. Mark Cuban, of Shark Tank fame, did not reinvest. He had invested $1.7 million in Red Swoosh, but was unsure about this illegal taxi company. Even though he backed the guy, he didn't back this particular iteration of his entrepreneurial journey. We know what happened next.
Worried about Key Person Risk? People Outlive Companies
Even now, investors get nervous when a company is helmed by an exceptional CEO without an obvious succession plan or other equally switched-on key personnel. They call this Key Person Risk. Think of OpenAI. When Sam Altman was fired, 738 of the 770 employees threatened to leave if he wasn’t reinstated. A company with a $90 billion valuation was beholden to one brilliant leader, to one key person.
If you buy shares in a person, like I'm suggesting here, you take on this risk to its absolute maximum. But after much reflection on how to mitigate this risk, it became obvious to me that when you invest in people, you're trading Key Person Risk for Key Company Risk.
Consider Reid Hoffman — you're St Paul VC and you think you're investing in the man, but you're really investing in SocialNet.com. You have taken on Key Company Risk. When Hoffman starts a billion-dollar company in the same space (social networking), likely leveraging many of the insights and resources he got through your capital, you don't see any of it. This shift underscores a key insight: the individuals behind ideas usually have longer economic lifespans than the companies they originate.
The average age of an S&P 500 company today is just over 20 years, and it’s only getting smaller. And that's just the successful companies … there are countless, countless startups founded by really smart people that operate for 2-4 years before collapsing. And oftentimes, these are stepping stones on the way to their ultimate company.
Which is why you need to diversify. Venture capitalists observe the power law — the principle that a few select investments generate the majority of returns. They allocate funds across various startups, understanding that a single standout success can offset multiple failures.
This is why I think Slow Ventures and Spotter will perform better than Upstart and Fantex did. Upstart encouraged investors to back one or two individuals that they liked, and Fantex did the same with athletes. Slow Ventures, though, which raised $20 million, raised this money from investors with the promise that they would invest in many creators. That they would diversify risk.
Of course, the case of the Libermans — talking to the SEC to list on the stock market — is the case of investing in a single brotherhood. But again, it's different. With their history of successes and failures, there are a whole lot of data points that investors can use, whereas a Harvard Grad usually just has one data point (their degree). In this way, we can compare Amazon (with its 20 years of successes and failures) to the Libermans, and a 2011 Trina Spears (a recent MBA grad) to a promising startup.
This All Feels a Bit Dystopian
This can all sound pretty dystopian, pretty quickly. Making humans into financial instruments, seriously? If you think about it too long (which I have), you wonder how far this could go … could hedge fund managers short someone’s stocks, and bet on their failure?
Imagine being a lead guitarist and breaking an arm, and when news breaks, watching your stocks fall in real time.
Dani Kollin's 2009 novel, The Unincorporated Man, imagines this world, where individuals are treated as corporate entities. In the book, most people don't own the majority of themselves, with their equity held by the government, their family, their schools and other nameless, faceless investors.
You also wonder how much control people get. During that drink, we started to discuss the logistics of it all. "Will you have a board?" one asked, "If I have equity in your life, surely I get a say in your life decisions … the jobs you take and the projects you start?"… and then "Can I approve your LinkedIn posts before you put them out?"
Lessin (the Slow Ventures guy) argues it’s not so different from valuing young startups, which often change early on so much and so often that “you’re primarily investing in the person or team anyway … all we’re doing is making that explicit.”
ISAs: A Rollcall
Before we wrap up, let's run through a quick rollcall of how income sharing agreements have played out in the last fifty years:
In the 1970s, Yale University experimented with an alternative to traditional tuition called the Tuition Postponement Option. Students paid no upfront fees but committed a percentage of their future income to the university for several years after graduation
In 1997, David Bowie needed $55 million in order to purchase his masters recordings (the original catalogue of his music) but simply didn't have the funds. He teamed up with investment bank Fahnestock & Co. to securitise his catalogue of 25 albums released before 1990. Together, they created the 'Bowie Bond' selling asset-backed securities, which gave investors a share in his future royalties for a fixed period of time. So, he raised $55 million upfront, and promised investors a substantial annual return of 7.9%.
In professional poker, players often require a large buy-into participate. Many take funding from investors, in exchange for a portion of their potential winnings. In the 2015 World Series of Poker, 24-year-old Joe McKeehen was partially 'staked'. When he won $7.68 million, a percentage was distributed back to his investors.
Lumni is a financial services company that provides an alternative to traditional student loans in Colombia, Mexico and Chile by offering income-sharing agreements. Instead of fixed repayments, Lumni "invests in students' futures", allowing them to pay back a portion of their income after graduation, a model that has supported over 22,000 students to date, democratising education.
The Thiel Fellowship, created by Peter Thiel, offers $100,000 grants and mentorship to individuals under 23, allowing them to skip college and pursue innovative projects or startups. While not debt or equity — there is no income sharing here — its success underscores the value of giving young people the funds they need to pursue their goals. The Thiel Fellowship has led to the creation of Figma (sold to Adobe for $20 billion last year), Immutable and Ethereum, and many, many others.
Wrapping Up
If you're still here, well done. We've covered a lot. From education to entertainment, sports to entrepreneurship, income sharing agreements have many applications. I'm excited to see how companies like Slow Ventures and Spotter progress.
Just a few words on why this is the right time for this to take off. We always hear venture capitalists say, "Here at Venture Capital Firm, we don't invest in companies, we invest in founders!" Of course, this is said in earnest — VCs usually care more about the builders than the building. But it doesn't matter; the outcome here clearly outweighs any intent (just ask St Paul VC & Primedia).
The thing is, high-risk high-reward investors are looking for a new asset class to invest in. The Venture Capital Industry's internal rate of return (IRR) has never been lower, and it's set to get even worse. The 2010s hype led to insane returns: between 2010 and 2020, the Cambridge Associates VC index had an average annual return of 15%.
Naturally, many punters started their own firms (the industry calls them Venture Capital Tourists) to try and get a piece of the action. At one point (2020-21) investor demand was greater than the quality of startups. But they got funded anyway. We're currently watching the aftermath of that.
Even on the sound investments, with so many firms bidding for investment and driving up valuation, profits have been almost completely competed away. In the last year, the Cambridge Index IRR is in the red: -10.94% (and this index is just the good VC firms btw). Of course — this was a market correction, and it’s likely the correction will correct itself, but definitely not to 2020 levels.
As a first-mover, Slow Ventures' bet on investing in human lives like Marina Mogilko and the Libermans' is undoubtedly going to see outsized returns. And in the next ten years, I think there will be more and more of these financial instruments cropping up. Imagine the Harvard MBA index: buy a piece of all the future earnings of a particular Harvard MBA cohort.
More to come.
A favour: If you’re working in this space or know someone who is, please, please reach out. Otherwise, if you are in the legal or tax spaces and have thoughts on structuring these kind of arrangements, also keen to hear your thoughts. All intel is very welcome.