

19-year-old auctioned off 10 percent of her salary for 10 years - mdturnerphys
http://www.geekwire.com/2013/19yearold-auctioned-10-salary-10-years-fund-startup/

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just2n
At 3% gain per year from relatively safe investing, $125k would end up being
$168k after 10 years. She'd have to earn an average after-tax salary of $168k
for the next 10 years for the investment to be equivalent.

That's fairly high, especially for someone just getting their career started.

And if she's very successful as an entrepreneur, running a business doesn't
mean you have to pay yourself some inane personal salary, especially not if
you'd owe 10% of it to an investor, so if her company becomes wildly
successful but she only collects some salary of 100-120k and equity which is
perfectly livable at only 90% after taxes, she could still walk away with an
enormous amount afterwards, yet the investor would have a significant loss.

I don't see how any investor would prefer this over equity, it seems like a
guaranteed loss?

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eridius
On the other hand, if her startup gets bought out and she ends up with
millions of dollars as a result, the investor's gonna get 10% of that.

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bryanlarsen
If her startup gets bought out, she ends up with millions of dollars of
capital gains, which isn't salary.

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ryusage
> It doesn’t matter where the income I receive comes from, whatever the after
> tax sum is for each year, the investor will see 10 percent of it.

They would still get a piece of that pie.

Edit: added quote from the article

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_lex
This is a really just a disguised angel investment - it converts between a
100% ownership in her company and 10% of her salary for 10 years, at HER
preference. It's actually a great deal for her - she's got very little skin in
the game:

If her company fails, she'll just convert the investment so she doesn't have
to actually pay out a cent and the investor gets 100% of zero (the value of
her failed company).

Also, even if the company succeeds, she'll be working on her pre-revenue
startup for a few years, and she won't have any meaningful income for a
significant portion of those 10 years.

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_lex
The biggest problem for her and her company may be that this exotic
arrangement may make it difficult to fund her company.

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reader5000
This just is how society currently works, except instead of $125,000 the young
person gets four years of classroom lectures. And it's more like 10% of income
for 20 years, depending on the school.

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pjscott
Student loans actually come on _less_ friendly terms; with loans, the amount
of money you pay doesn't depend on your post-school income, so the financial
burden falls equally on everyone regardless of their ability to bear it.

Imagine, hypothetically, that the student loan system were replaced with
percent-of-income contracts like the one in the OP. This would give investors
an incentive to maximize the total future income of the students they invest
in, minus school cost. There are some problems with that, but frankly, I much
prefer those incentives to the ones created by the current student loan
system, where the most profitable strategy is to get students in as much debt
as possible.

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manicdee
That is how student financing works here in Australia: below a certain
threshold income (about $37k in a country with median wages of about $50k) you
pay nothing, then you pay a percentage of your income over that.

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seanalltogether
At what point does this come close to breaking antislavery laws? Where do you
cross the line into indentured servitude? At 51% of salary, 100%, where?

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ryusage
That seems a little over dramatic...

If anything, this is a decent-sized loan, with a very safe, variable repayment
amount that is defined to always be a small amount of her income, and the
collateral is a company that may or may not succeed. More than that, the
investor only even takes the company if she's dishonest. There's almost no
downside for her here.

If you want to be concerned for someone, I'd be concerned about the investor.

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seanalltogether
The point is to take legal scenarios like this and see how far they can be
pushed. What if her parents were the ones auctioning her potential earnings
off and using the money to pay of a mortgage. What if the following year they
did it again for another 10%? Things get really sketchy when you draw up these
kinds of contracts that revolve solely around an individual.

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ryusage
Okay, so you're suggesting this seems to set a dangerous legal precedent with
slippery slope potential? I still say it's just a loan. To your argument here,
can her parents legally take out loans in her name? I don't actually know the
law there, but I don't think a lawyer would have a hard time answering that.

To your earlier question about 51% or 100% of her salary, if an investor loans
me $500,000 at 0% interest to pay back in 10 years, and I only make
$50,000/yr, that would suck, but I'm not becoming a slave to that investor. I
can't afford to pay that back, so I'm going to default on my loan. There's a
huge difference between that and literally being owned by someone.

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ChuckMcM
Funny because I was doing the math on this exact question the other week. I
was thinking zero coupon bonds but conceptually they are similar. Basically
computing the discount rate for a STEM degree in terms of forward earnings
potential. Consider a technical degree with a starting salary of 75K going to
150K in year 10. With a linear progression that is basically about $1.0875M in
salary over 10 years. 10% of that would be $108,750. Lets make the face value
$100K, The question being what discount rate would you need to offer a bond at
that matured in 10 years? 10 year treasuries [1] are currently at not quite
2%, junk bonds might be 6 - 7%. So at the low end we sell our bonds for $85K,
pay them off in 10 years at $100K for an approximate 2% annual yield. But at
7% you have to sell them at $50K for an annual yield of 7%. So depending on
how risky investors in this persons bonds considered them, would affect the
discount rate for them. Then you could bundle these bonds into tranches and
sell off the high end as treasury equivalent and the low end as a more
speculative investment :-)

[1] [http://www.treasury.gov/resource-center/data-chart-
center/in...](http://www.treasury.gov/resource-center/data-chart-
center/interest-rates/Pages/TextView.aspx?data=yield)

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sharkweek
Mike Merrill's experiment sounds similar --
<http://www.wired.com/business/2013/03/ipo-man/all/>

Can't say I'm not fascinating in such an idea

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Fuzzwah
I wouldn't say that I wasn't unimpressed with your double negative.

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sharkweek
how about I triple it

I can't not say that I'm not impressed

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jdunck
Please take this sort of thing back to reddit.

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tjdetwiler
This is common, though most people just call it a student loan.

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gnicholas
If she didn't care about her reputation, she could screw over the investor
pretty badly by deferring her income. She could even sell her company (for
stock of the acquirer) and then hang onto the stock until the payback period
has ended. The sale transaction could be structured to avoid a current tax
hit, which would also result in the investor being cut out of the loop.

Additionally, there's the possibility of shifting income to family members
(and the complicated question of what happens if she gets married and has
income from the investment of community property assets).

This type of auction could also raise questions of legality/constitutionality.
Although it doesn't seem that bad to give up 10% for 10 years, it would feel
different if someone sold 90% for 90 years. Starts to sound like a bit like
slavery, albeit voluntary at the outset.

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nemesis1637
I think Warren Buffet once said that he'd give college graduates $100,000 now
for 10% of their lifetime income. This kind of reminds me of that. And begs
the question, should somebody build a platform to make transactions like this
more easily possible?

Edit: I just remembered Upstart (<https://www.upstart.com/>)

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rayiner
We already have things that give you money now and take 10% of your lifetime
income. They're called colleges. Well, except the "give you money now" part.

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temphn
Bingo. 250,000 paid back over a decade with interest is a sizeable chunk of
lifetime earnings.

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nilkn
Are people actually going into $250k of debt just for an undergraduate degree?
I wouldn't even consider that sort of debt unless it was for medical school.

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ihodes
No, no one is (without some weird circumstance like their guardians are able
to pay for the college, but would rather take on debt for tax/other reasons).
Average debt is about an order of magnitude less, and I believe the mean is
even less. Avg is pushed up by bad schools charging absurd fees.

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darth_aardvark
You mean the median is even less, right?

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ihodes
Yikes, yes.

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anip
I would have taken 10% of her company + 10% of her salary so that in all cases
my interests would be aligned with hers.

If her company is successful then she might just stay on with nominal CEO
salary (<200k) so not much upside from the salary component.

10% of her salary would be my hedge (and hers) if the company failed.

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nnash
My original reaction was surprise since ten percent after tax seemed like a
lot but after thinking about it this really is that bad of a deal for the
entrepreneur, ten percent is a tithe.

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illuminate
The cynic in me wonders if the "deal" is with a rich family member to give her
a ton of free press.

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grandalf
This is why it's silly for people to go into debt to pay for college.

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aviswanathan
Any idea which college she goes to?

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michaelochurch
More impressive (and useful) would be an auction of _time_. Percent of salary
can always be gamed.

I'm considering offering 5 years of a one-Saturday-per-month (12-hour day)
consulting commitment for somewhere around ~400-800k. Taken as an hourly rate,
it seems very high, but:

(a) I'll code, make introductions, advise, or whatever else is needed.

(b) smart people can add high value in small amounts of time ("fresh pair of
eyes" effect). I'm sure there's someone out there who could extract that much
value from me.

(c) if I became wildly successful, the person would be able to "pimp" my
consulting services out to a client at a higher rate and pocket the
difference, and

(d) with the 5-year commitment there's a huge call option involved that's
probably worth more than the underlying.

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sliverstorm
Sounds to me like you are just offering to be employed on a somewhat unusual
schedule.

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michaelochurch
It's different, because it takes advantage of the nonlinear value of time.
It's specifically designed not to preclude other employment, hence the
Saturdays.

A highly competent person's marginal value per hour starts very high, then
drops around the 100-hour per year mark, then goes up slightly again from 500
to 2200 hours. Most people are paid based on the bottom of that U-shaped
curve.

For example, pretty much any company would benefit from hiring someone like me
at $1000/hour for a few hours at a time, because I'm very good at spotting
problems and coming up with plausible solutions... but very few companies
could justify a full-time retainer at that hourly rate.

So that's the economic theory behind it. I feel like career modularity is
going to be more important in the 21st century anyway. The evil of the current
arrangement isn't working for other people or "being employed"; it's the lack
of diversification and the fact that people are coerced into a one-size-fits-
all model that has ceased to add value, especially at the upper end.

