

Nonprofit CEOs Selling Equity in Themselves: $300K for 3% of Lifetime Earnings - ALee
http://www.socialedge.org/discussions/funding/invest-in-me-take-my-equity

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patio11
Can I have a facts of life discussion with you for a second?

I enjoy giving money to charity. I also enjoy investing. Your proposal is not
competitive with the investment options available to anyone with a substantial
amount of money burning a hole in their pocket. (For that matter, your
investment is not competitive with investment options available to me, and I'm
just a middle class American who is capable of using the computer and a
discount brokerage.)

For example, take TIPs. They're backed by the full faith and credit of the US
government, not somebody who _will_ retire eventually and may be hit by a bus
tomorrow. They pay out 3.785% of $300k (annually), rather than 3% of a number
which is likely to be substantially less than $300k (annually). That starts
accruing tomorrow, rather than whenever the US government gets a paying job.

They are liquid -- there are many people interested in buying TIPS, and while
the value will fluctuate they can be exchanged for cash essentially instantly,
for a minor transaction cost, at any point in the future. Your security is
illiquid -- the number of people who would considering buying it is low, the
number of people who would consider buying it from an existing holder is
negligible, and the transaction costs associated with it are high.

TIPS have essentially no regulatory risk and have a built-in support
infrastructure. Your security has significant risk that the contract will be
unenforceable against you when you tire of your indentured servitude in 15
years (or 15 weeks), and no built-in infrastructure to make the guarantee
anyhow. My accountant has no clue how to treat your security, but he is
willing to investigate the matter at about $300 an hour. Hopefully he will
tell me "WTF are you thinking, no, just no" early rather than running the
clock out, if not, that comes directly out of my investment returns.

The details of your agreement are not fleshed out. This is presumably because
the idea has not passed the napkin stage: that should tell you something.
Let's see, does this cover investment income? Does this cover equity stakes
you may receive in companies you found, and/or receive in return for services
rendered? If so, does that 3% accrue immediately or at liquidation of the
stake? Are you obligated to liquidate it at a timing preferable to the person
holding the equity stake in you?

Do you smoke? Sorry for prying, had to ask to get a good picture of how to
value this security. Can I sue you if you start smoking? I mean, I'm not an
actuary (I'll have to hire one -- drats, more costs), but I'm pretty sure if
you start smoking you probably cost yourself somewhere north of six figures of
income, and since 3% of that is mine, you're essentially stealing from me.

Your proposal doesn't make much sense for charitable reasons, either. I like
charity, but I do not consider all charities to be created equal, and most
donors are like me (with different preference sets, granted). For example,
when I think charity, I might think feeding the hungry or educating poor kids
or supporting veterans. You might hypothetically think abortion clinics. That
would be deeply problematic to me. I don't really have that risk if I direct
my donor dollars.

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albertsun
All those same arguments basically apply against Angel investing in a startup.
The only exception between the details of the agreement not being fleshed out,
which I assume they would flesh out with any potential investor. Taxable
Income might be a good guideline for what and when income is paid out to the
investor.

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patio11
Meet Bob. He's a swell guy. Would you invest in Bob's startup at a valuation
of $10 million? I won't tell you what industry the startup is in, what its
business plan is, or whether the startup actually exists or will exist in the
future. But Bob's a hungry lad with a gleam in his eye, so that's alright
then.

Seriously, if you really wanted to give Bob $300k for an angel investment,
wouldn't it make sense to wait until he actually had a startup to invest in?

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albertsun
So these people are asking for a slightly high valuation. The basic concept
isn't terrible though.
<http://usgovinfo.about.com/library/weekly/aa072602a.htm> gives some numbers
for average lifetime earnings. People with professional degrees earn over a
lifetime an average of $4.4 million. Sure you need to calculate a net present
value of that, but it's possible to estimate someone's potential future
earnings.

Then you can pick a portfolio of people who you think will perform above
average, in a variety of fields to hedge your risk, and provide advice and
mentoring and....

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rainyday
Those guys are retards. Why would they place themselves in lifetime indenture
to anyone? I don't know if the 13th amendment or other laws would prohibit
this sort of arrangement. Why would anyone invest like this in an individual,
given discount rates and possible other investments? They seem to think
they're going to make lots of money--at least they are implying this. If these
guys earned so much money then why are they making so much money out of
nonprofits? I haven't exhausted the stupidity of this idea.

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Alex3917
This seems like a great deal for the entrepreneurs since they'll probably
never have to pay out due to the 13th amendment.

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grellas
I wonder how I would feel if my "asset" filed for bankruptcy and discharged
this obligation after taking my money and squandering it? _O tempora, O
mores!_

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deyan
As I wrote in the comments of that article, their approach suffers from a
number of fundamental limitations, that are addressed in the alternative
"investing in superstars" idea discussed a while ago: <http://bit.ly/jQGzg>.

Nevertheless, food for thought!

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perokreco
Please don't use link shorterners, there is no need for them here.

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charlesju
At 80 this makes perfect sense. Too bad I'm 23, wherein this makes no sense.

