Today, this company called Upstart, which lets you buy equity in people (and then get a cut of their income — potentially even all capital gains, as verified by tax returns — for ten years afterward) launched and announced funding from Kleiner, NEA, Google Ventures, First Round, Crunchfund, and Mark Cuban.

It looks like they have a really smart team (Tons of Xooglers! Celebrity investor! Thiel fellow!), and this is obviously super innovative... but it still strikes me mostly as a colossal legal nightmare.

Felix Salmon wrote about them, skeptically, in March, and I'm inclined to agree: "The legal advice alone that you would need to protect yourself would probably consume most of what you raised."

What do you think?

.... indentured... slavery..... WTF??!?

Legal and ethical issues aside, I've long wondered if a similar model could work as an alternative to crazy-high tuitions/loans for law school and medical school. Tuition would be free, but you'd owe your alma mater X% of your future income.

In theory, it'd have a similar effect to those schools' loan-relief programs: encouraging students to go into public service, rather than rush after high-paying jobs just to pay off loans. But it'd skip those loans altogether.

Having schools, rather than individual entrepreneurs, hold the equity might make the arrangement more savory. On the other hand, perhaps it'd pervert the schools' incentives to provide a solid education.

Would that ever fly?

It would work in developing countries, the return would be higher. It would be a win-win anywhere but in North America. I say that had this existed during my first year in University, I would've signed up, only to regret it later.

Tech innovations come first, followed by culture, then legal and government. The biggest problems in tech today isn't tech, but our cultural interpretation and integrations of tech. Scaling ethos is harder than scaling tech; for example, Kickstarter hasn't had any massive failures or frauds yet, which is a testamount to their ability to scale the ethos of the community of creators and funders. So far.

For "investing in people", the real question is can the idea find the right initial crowd, create the right ethos, and scale that community. Legally, I think buying equity in people can be handled with creating the right share classes, and that culture, not legal, is the biggest short-term and long-term problem.

I'll ignore for a second the huge regulatory hurdles faced by Upstart, and focus on the negative "indentured slavery" reaction that many people have.

It is important to recognize that, when it comes to repayment, Upstart is not functionally all that different from how we currently treat student loans.

Since 2005, even student loans made by private entities cannot be discharged by bankruptcy. This means that anyone who took on a student loan from 2006 onward is essentially indentured when it comes to servicing that debt. Without evidence of "undue hardship", these loans cannot be escaped in any way, regardless of your earnings or financial well being.

In many ways, a service like Upstart gives a student more flexibility, not less.

> "In theory, it'd have a similar effect to those schools' loan-relief programs: encouraging students to go into public service, rather than rush after high-paying jobs just to pay off loans. But it'd skip those loans altogether."

But then the school would be incentivized to admit people who they think will make more money, so you better not let on that you want to join the peace corps afterwards.

Right — that's a big concern. Perhaps there's some way to buffer the admissions process from the financial concerns. In a way, colleges face a form of this conflict when considering applications from the children of wealthy people/donors.

Here we're giving tools to allow someone with potential to give his total earnings to someone else. If you're poor it's brilliant.

One thing we can learn from history, is that bad guys come at one point or another. It's inevitable. Here we're giving some serious tools of enslavement if miss-used right? So what would the T&Cs regarding someone that isn't able to meet quarterly performance checks? How rigid would the have to be? Like Murphy's law, if it can go bad. It will.

So since we're still in the infancy stage of these types of businesses, we should test them over a limited time span, objectively in the legal sense of things; but, we shouldn't take for granted an idea as brilliant until the testing and due diligence has been done.

> Here we're giving tools to allow someone with potential to give his total earnings to someone else. If you're poor it's brilliant.

Two quick points on this. (a) I don't think anyone's suggesting you would owe your entire earnings, just some (much smaller) fraction. (b) It might be brilliant if you're poor, but also brilliant if you want to take a risk — say, going to medical school — you couldn't afford on your own.

Don't get me wrong, I find it brilliant, especially in developing countries like I wrote above, I'm just trying to think it through. Say if a friend of mine was considering doing this I would be wary of the legalities of it before giving the green light. I can't even imagine what kind of T&Cs would be attached to this. (I'm totally enjoying this discussion btw)

For individuals with limited access to capital this sounds like a good option. For this to work Upstart/Backers would also need to have some level of engagement with their Upstarts (their term). This could be via mentoring or other support for folks who are typically not part of the VC world.

It reminds me of Fix UC. An idea floated by students at UC Riverside that UC graduates pay 5% of their earnings for 20 years. While they are attending they pay no tuition, which is the time when students can least afford to pay for much beyond living expenses.

fixuc.org

I just get visions of William Gibson dystopias in my head. That and feudal era flashbacks.

Here's a potential conflict of interest: Say that you are a software engineer and that Upstart, which is backed by Google Ventures, has a 5% stake in your earnings. Will Apple be willing to employ someone who is beholden to their competitors this way?

In short: how would these kinds of arrangements affect mobility in the marketplace?

I think this approach would successfully lower the applicants to banking and consulting post college and distribute them to riskier careers because it would offer a better option in the face of scary school loans, since 3-5% of a smaller starting salary would seem insignificant to a single college grad. Also I think it would be interesting to see what happens to the negotiations upon hire and periodically as the school or company who invests in the student inquires about the value of the equity options / grants given to students who join startups.

Higher risk career paths are not necessarily a great feature for investors unless they can diversify across many students. Ironically, this is why most western countries outside of the U.S. subsidize higher education to the point where it is near free and recoup that money through higher taxes!

There is also a risk of moral hazard in this type of market. Instead of a dystopian future, we might end up with a group of people that take out these loans and then decide to use half of their 20s to raise kids or travel around the world. That's not necessarily a net negative for society, but would sure put a hurt on investors.

Tom- 3-5% of, say, 40K a year can mean a lot more than 3-5% of 80K in terms of quality of life.

Consider behavioral economist Daniel Kahneman's assertion that 60K a year is pretty much the sweet spot for income. After 60K people do not report being more content, but up until that point every dollar makes a difference.

It may not be a great loss in terms of absolute dollars, but 2K out of 40K can have a huge impact on what services and goods one has access to.

ted.com

I was thinking more of behavioral economist Richard Thaler's view on how low income households are currently less inclined to prescriptive savings and therefore giving them an easy option to do so would potentially incentivize them to make their own decisions on the level of risk they'd like to take faculty.chicagobooth.edu

As Thaler puts in many of his works, the concept of benchmarking is important for expectations - am I looking to make 40, 60 or 80k when I graduate? Will my earnings (salary + equity) grow more linearly or exponentially?

Also, that's why I added Brad Hargreaves to the discussion, who back in 2010 wrote about something similar to this discussion - startup burn rates vs. personal burn rates.
bhargreaves.com

To be honest I'm not sure if I see the correlation between the seed idea of 3-5% as a kind of corporate tithe and the idea of prescriptive savings. One is debt repayment and the other is savings, after all. I haven't read Thaler's paper (but it just went on the stack, thanks!), but on principle I see incentives for savings as a net good.

The kickstarter model is still better for someone to get funding. One project at a time is easier to manage I think. Instead of an individual that can dramatically change over the course of a few years. It's risky... for both investors and individuals.

So let's say someone takes the money, and after they're done with college their income isn't high enough to even break even with what the investors had put in. Would that be justified in this model or are all investors looking for at least 3-5% returns?

Of course there is a lemons problem that requires scale to solve, it's about risk spread over a large sample, and the returns in the early years are likely to be lower but over the entire time horizon might look good. Also, there's the issue where currently there is usually a 6 month window where students don't have to start paying their loans, that might have to go away. Finally you have the issue of those who just don't get a job at all.

People change so much in those formative years, it's a risky investment.

Doesn't the six months window seem short, compared to those offered by student loans? Of course, you're not paying a monthly loan payment but it seems like that would be only do-able for seniors who are looking to work six months after receiving this money.

And is there any minimum investment an investor has to pay? I couldn't find much on that when I looked on the site.

I once suggested this idea to a friend of mine and he responded by saying that it sounded like I wanted to sell stock in myself. In a stock market, people generally sell stock when they think it is too risky or is likely to go down and people buy stock when they think it is a good investment. So if a person is selling stock in himself it basically means he doesn't believe in himself. After all, there is no one with more insider knowledge about you than you have yourself -- and if you know yourself and want to sell, that's a bad sign.

Sorry Jon but I can't buy that. Companies sell stock regularly to raise liquid capital. Facebook IPOing wasn't a signal they don't believe in their product, and the fact that startups sell part of their company (or stock) for initial investment is actually the opposite- a mark of confidence that if they have some capital, they can succeed.

Sounds like a flawed logic to me. You can't buy a house without a loan, or at least most people need a loan, to this effect you pay interest and an extra part of your salary to buy the house. Likewise, to pay for university, if you give a part of your future salary, it is... I think, not so different from paying interest. It doesn't mean that you do not have confidence, but that you don't have cash money. That's all.

There is a fundamental difference between a person and business. There are very few things that a person requires liquid capital for in order to increase their earning power. About the only thing that comes to mind is education, and even that is in a bubble these days. In any case, one can easily get an education loan for a pretty reasonable interest rate instead of putting a percentage of your future earnings at stake. In this technological age writing a best selling novel or starting an awesome tech company require nothing more than an iPhone and a MacBook. It is your character, your discipline, and your brains that count -- and none of those can be increased with "liquid capital".

Let's say that your a brilliant kid, but that you dropped out of college, you're a brilliant guy, and chances are your character and intelligence is going to make way for either a brilliant career or a reasonable business, loans wouldn't apply, but VC money could help out a dip, or hard time in one's life, right? Plus VCs get paid to manage the business a bit, perhaps they could help those individuals stay focused too? I wish I had a top VC mentorship straight out of high-school.

@Jon - I see your point but you/your friend have chosen the wrong asset class to use as an analogy here. It's not really akin to buying stock at all in its current format — it's a cash infusion that effectively gets repaid via a system of dividends up until the total amount of the original loan was repaid.

I guess it's possible that this could devolve into a secondary market for "shares" in people, in which case the signaling problems of transferrable shares would be more similar to what you describe, but I doubt this would ever be provisioned that way.

Also, "There are very few things that a person requires liquid capital for. ... About the only thing that comes to mind is education." Yes. That is the reason this program exists.