Elite professional athletes can make upwards of $25 million per year. Who wouldn’t like to share in that cash cow? Now you can. Fantex Holdings has announced that they will sell off 20% of the future earnings (on and off-field) of Texans running back Arian Foster. Fantex plans to make to making about $10.5 million from the IPO. Foster would pocket $10.5 million, with Fantex keeping $500,000 for its work.
Right off the bat, some people are likening this to slavery or indentured servitude. That’s way off base. This is a case of someone entering into a contract of their own free will. In this case, Foster actually has professional representation (an agent) and thus can be considered sophisticated particpant. Nobody is taking advantage of Foster.
I’m interested in seeing how this develops. Investors will have no corporate governance rights, which might be a good thing. I can imagine a scenario where Foster wants to sign the second highest free agent offer he receives, for non-monetary reasons (such as wanting to win a championship or being close to home). Investors would be in an uproar if he leavse $5 million on the table, since that means that they are losing $1 million. Investors may want him to take every endorsement (or acting) opportunity that comes his way, whereas Foster may want to be more selective. Essentially, it would be in the best interest of the investors for Foster to never have any free time and spend all his time making money.
I won’t even get into the possible tactics of someone who sells short on Foster.
Will investors make money? It’s hard to tell. While the average length of a running back’s career isn’t as short as the talking heads would have you believe, there is generally a drop-off when the guy hits 30, and Foster is 27. A top quarterback would be a better long term bet. I doubt that Foster’s investors will make a profit, but he could be a pioneer in a new field.
Those who read my work know that I an a big baseball fan. I think this may be where this market could explode. Minor league players, especially at the lower levels, make peanuts. First year salary can be no more than $1100 per month. Sure, the cream of the crop at the top end of the draft get bonuses of a million dollar or more, but the majority of minor leaguers sign for a few thousand dollars. The Red Sox signed their 2013 7th round pick, Kyle Krause, for a bonus of $1000 – and he was one of the top 250 picks. (Full disclosure: that doesn’t mean his talent was in the top 250. Teams have a fixed amount to spend on the top 10 rounds and generally “reach” for a rew players they know they can sign cheaply.)
The benefit for the player is getting up front cash, as well as insulating themselves against never making the major league. The vast majority of minor leaguers never make it to the majors – either because of injury or inability to adjust to higher level competition.
That’s not to say that the player is the only one who stands to benefit. Let’s say investors pony up $5 million for 20% of Kyle’s future earnings. If he flames out and never reaches the majors, the investment is basically worthless. However, if he becomes a star and signs a $100 million contract, that $5 million investment reaps a $20 million dividend.
Is this a revolutionary idea? Not really. For years, poker players have headed to Vegas after being staked by their backers – people who get a share of any money they win at the poker table.
This should be viewed as a canary in the coal mine, i.e. a sign the markets have once again reached irrational bubble territory. Much of what’s happening right now in the markets is reminiscent of the dot com bubble with companies such as Tesla, Yelp, Zillow and many others up over 300% in the last 12 months on little earnings and over stretched price-to-sales ratios. History may not repeat but it definitely rhymes. Your reference to gambling in Vegas is quite apropos … not just for this new speculative Fantex issue, but for the entire FED supported debt-fuled Ponzi market.
Tommy Z says
Wouldn’t the player have less of an incentive to work hard if he was working for pennies on the dollar? If I were an athlete, I’d sell shares in myself right before retiring or doing anything that would have a negative impact on my income.
“Wouldn’t the player have less of an incentive to work hard if he was working for pennies on the dollar?”
He still has a pretty strong incentive to maximize his income. He is getting 10M + .8X. A higher X is better, If he earns 10M, his total income would be 18M (10M from the IPO + 80% of the 10M earnings). If he earns 100M, his total income is 90M.
Slightly less of an incentive? Sure, but that’s always true of founders after an IPO. Zuckerberg had less of an incentive after Facebook went public.
Tommy Z says
He is getting 10M + .8X. A higher X is better, If he earns 10M, his total income would be 18M (10M from the IPO + 80% of the 10M earnings).
Investors would lose 80% though! His earning years are limited and do not go on forever.
Right. Everyone wins when X is higher.
For some stars, the earning goes on longer than you might initially think – it’s not timeboxed into their playing career. There are some income streams that keep going long beyond the end of a playing career. In any case, you’d want to analyze this up front and only invest when there’s a high probability of profit, just like any investment. You can’t invest just because you like the player.
I can’t imagine how this is going to be enforced. It isn’t like a judge is going to honor a lifetime contract on someone or what if the underlying promoter of the fund goes bankrupt?
Seems like a cool idea just not sure how it will work out in the long term. Then again if someone told me the business idea behind ebay I would have said no shot anyone will pay a stranger for the hope an item shows up at their door.