Post: #1

http://qz.com/137216/fantex-arian-foster...vestors/#!

Quote:Arian Foster is the smartest guy in the room. He’s an American football player who’s convinced a start-up to pay $10 million for 20% of his future income—and there’s little chance he’ll make enough money for the firm to recoup its investment.
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That’s not stopping a group of Silicon Valley veterans taking advantage of newly loosened securities rules from asking you, potential investor, to buy stock and fund the deal, which it hopes to repeat with other famous athletes. This is probably not the kind of ”emerging growth company” the US legislators who drafted the JOBS Act had in mind.
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“Third-party ownership”—purchasing a minority stake of an athlete’s future contracts—is new to the United States. It’s not new to the world, particularly in the free-market world of international soccer, which doesn’t have the same cartel-driven collective bargaining agreements that dominate big American sports leagues. Teams will pay tens of millions of dollars to other franchises just to purchase player contracts, on top of the salaries they pay the players themselves, and investors have occasionally stepped in to help clubs afford those contracts—and to benefit when those contracts are sold again.
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This summer, for example, Barcelona Football Club paid €57m to the Brazilian club Santos for the rights to sign their star player, Neymar. An investment fund who bought a share of his contract in 2009 for the equivalent of $2.6 million received €6.84 million ($8.9 million) as part of the deal—a pretty nice return. But soccer’s global governing body is trying to crack down on the practice, worried about the potential for foul play.
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Nonetheless, a US company called Fantex is attempting a similar play. It’s created a platform to purchase shares of players’ brand income, including salary, endorsements and investment opportunities, with up-front payments. Foster is the only player on the Fantex roster, and if it succeeds in its plan to sell $10 million in equity, he’ll be the main beneficiary. For Fantex and its investors to break even, Foster will need to earn at least $50 million for the rest of his life, paying the company back in quarterly installments.
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Will he do it? Under his current contract, Foster can earn a maximum of $25.5 million in the next four years playing in the NFL, and $383,000 and $455,000 of endorsement fees in 2013 and 2014. Even assuming that Foster doesn’t get injured and continues earning half a million each year in endorsements, he’ll still be short a good $20+ million toward Fantex’s break-even earnings. That’s why the whole deal is dependent on Foster earning a second big contract in 2017, when he is 31 years old. Foster is talented, but there aren’t a lot running backs who wind up getting a significant paycheck at that age because of widespread injury and declining performance.
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It’s possible, of course, that Foster will have a sudden explosion in endorsement pay or earn big paychecks as a TV commentator or find himself in the position to purchase a sports franchise like basketball great Magic Johnson, but that’s a big bet on one player. Fantex no doubt hopes to diversify its player portfolio in the hopes that one of its stars will really take off, subsidizing other losses, and to make money on commissions paid by fans trading athletes’ “brand stock” on its platform.
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But even Fantex’s success doesn’t mean that fans investing in the business will come out on top. Equity in Fantex will entitle fans to ownership of a “tracking stock” pegged to Foster’s value, and the ability to trade it in a marketplace created by Fantex, which will take a commission on all sales. As Reuters’ Felix Salmon points out, individual investors aren’t necessarily exposed to diversification or even dividends from Foster’s income, and the company has every chance of going bust.
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Salmon also notes how it might seem exploitative for a bunch of middle-aged white men to essentially purchase a 20% tax on a 27-year-old black football player. While the vibes are unnerving, we think Foster—known as much for his off-field intellectualism as his on-field dominance—might have the last laugh. Look at it this way: Foster is only guaranteed to receive about $10 million more in the next four years for his contract; the rest depends on his health and performance. In a volatile business, it might be sensible insurance to take an additional guaranteed $10 million from private investors, especially if you are unlikely to pay it back in full.

Post: #2

Maybe I'm not understanding this correctly but this sounds similar to a "360 deal" in the music industry, which is widely considered a bad idea.

They pay you upfront (in music this would cover production costs, marketing, etc.) and then they get a portion of EVERYTHING you do. Tours, merchandise, CD sales, endorsements, everything.

It doesn't mention anything about the length of the deal...in fact, it says something about him becoming a broadcaster or owning a franchise "like Magic Johnson". Magic is in his 50s and earned the majority of his fortune after his playing career was over. If his deal is that long he completely fucked himself.

Every investment Arian makes, any jobs he holds, everything is being taxed by this deal. Why take a $10 million loan unless you plan on investing it?

If the limit on this deal is as long as it implies, this looks like a terrible idea.

Post: #3

buying shares in an athlete ??? sounds too rrrriskay to me

Post: #4

Pretty soon fantasy football trades will be made on the New York Stock Exchange

Post: #5

They've been doing this with the movie business for a while as well - see Relativity Media

Basically they do it with a "slate" of films - or in this case athletes. Many will fail, but there will be a couple superstars that (hopefully) make enough to cover the losses and then some.

It's not Arian Foster who outsmarted the investor, it's the investment firm that put together the deal and sold it to investors who outsmarted everyone. They get their commissions either way without any risk to them. A lot like Wall St: minimal risk for investment banks who put together all the deals, raking in billions of $$$, and then sell the stakes to mutual funds, pensions, and 401ks who take on all the risk. Be the middleman!

Post: #6

(10-19-2013 02:06 PM)Enigma Wrote:  Every investment Arian makes, any jobs he holds, everything is being taxed by this deal. Why take a $10 million loan unless you plan on investing it?

If the limit on this deal is as long as it implies, this looks like a terrible idea.

I think it's a dumb move on the part of the investors unless this idea in general takes off and firms are able to acquire a large, diversified pool of athletes. For the athletes though, assuming they are wise with their money, they can pour that money into smart, well-diversified investments and just live off their NFL income. $10 million is a good amount of money to invest with. Apparently, Arian is known for being relatively bright.

Post: #7

What if he just pockets the money and basically stops working in his mid 30s? If he was wise with his money he should have a minimum $25 million nest egg at that point to earn interest and dividends off. Just squeezing out 4-5% from that annually would net him a cool million a year.

Would the investors be entitled to 20% of his interest and dividend income?

Maybe he's got some sort of legal trust or offshore account planned that would shield his investment income. Or maybe the contract is structured to exclude that. It could be a good deal for him if he's got something like that.

I can't see why anyone would sign up for something like this if they intended to keep earning a lot, unless they really needed the money immediately (which doesn't seem to be the case here).

Post: #8

(10-19-2013 03:06 PM)scorpion Wrote:  What if he just pockets the money and basically stops working in his mid 30s? If he was wise with his money he should have a minimum $25 million nest egg at that point to earn interest and dividends off. Just squeezing out 4-5% from that annually would net him a cool million a year.

He'd be contractually bound to perform with the exception of a severe injury.

For the investors, that's likely a risk they take on, and why they would bundle this dude's future income stream with other athletes future income streams as well as a bundled security.

Quote:I can't see why anyone would sign up for something like this if they intended to keep earning a lot, unless they really needed the money immediately (which doesn't seem to be the case here).

Good point. I wonder what his game plan is on what to do with the cash upfront?

Post: #9

(10-19-2013 02:53 PM)Hencredible Casanova Wrote:  I think it's a dumb move on the part of the investors unless this idea in general takes off and firms are able to acquire a large, diversified pool of athletes. For the athletes though, assuming they are wise with their money, they can pour that money into smart, well-diversified investments and just live off their NFL income. $10 million is a good amount of money to invest with. Apparently, Arian is known for being relatively bright.

But they get a cut of all his income. They mentioned investing in a franchise so I'm assuming investments are included. I know that's how 360 deals work...they get a portion of any and all income. You could start a clothing line or open a restaurant and they still get a cut.

There is definitely a degree of risk on their part. Say he tears his ACL tomorrow, doesn't play out his contract, and goes bankrupt a couple years later.

But even then, he is fucked because they're still going to take 20% of his McDonald's paycheck.

So, basically, any significant increase or decrease in income will cause him to lose out.

He has been struggling this season along with the entire team but he is actually underpaid right now based on his past few years. He was a top 5 running back coming into this season. The other guys in his class are getting paid twice as much.

But look at it this way. Say he renegotiates and extends his contract after a strong season next year. Now the $10 million is almost paid off in about 5 years. At that point in his career, the minimum he can be signed for is nearly a million per year. He could go into broadcasting, get a job at Tennessee, work investments, etc.

The investors are now raking in cash with no further risk. He paid off the loan but he has to keep paying them.

Post: #10

The problem with this is the moral hazard.

Farming out his equity decreases the incentive for Foster to perform well.

When you buy a share in a company, you are theoretically an owner in the company and thus have a say in the company's decision-making, on top of the claim on dividends.

I imagine that when you buy a share in an athlete, you do not have a say in what the athlete does--else it would be close to indentured servitude. You more or less become a debt holder with an equity risk profile--but worse, due to the moral hazard involved.

I'm guessing the investors in this are in it to eventually find greater fools to sell to.

Post: #11

A similar program of selling future income is used to pay student loans.

http://www.nytimes.com/2013/07/20/your-m...nings.html

Quote:Daniel Toole is a 28-year-old architect in Seattle who plans to attend Harvard’s master’s program in urban design. But instead of paying his way with graduate student loans, he is trying to raise money by selling a slice of his future earnings to investors.

He needs $80,000, even after scholarships and grants. Mr. Toole wants to finance a big chunk of that through a new company called Pave, which connects people like him with “backers.” If he reaches his goal and raises $30,000 from Pave investors, he will pay them 7 percent of his projected annual salary for 10 years.

“If I decide to go into the Peace Corps or do something like work for a major firm that didn’t pay well for the first couple years out of school, the percentage of total income would be quite a bit lower than standard 10-year loan paybacks,” said Mr. Toole, who has commitments for nearly $11,000 so far.

Post: #12

I always thought that "selling stock" in upcoming bands would be a good idea. My father and his buddies used to "sponsor" Kpop acts in Korea back in the 90's before it got so big that the production companies didn't need any more outside money. Risky but sometimes they'd get lucky and have a performer blow up the charts. Much easier in Asia because the talent are basically indentured servants, but still might be interesting in the US.

Post: #13

(10-19-2013 04:26 PM)Bacchus Wrote:  A similar program of selling future income is used to pay student loans.

http://www.nytimes.com/2013/07/20/your-m...nings.html

Quote:Daniel Toole is a 28-year-old architect in Seattle who plans to attend Harvard’s master’s program in urban design. But instead of paying his way with graduate student loans, he is trying to raise money by selling a slice of his future earnings to investors.

He needs $80,000, even after scholarships and grants. Mr. Toole wants to finance a big chunk of that through a new company called Pave, which connects people like him with “backers.” If he reaches his goal and raises $30,000 from Pave investors, he will pay them 7 percent of his projected annual salary for 10 years.

“If I decide to go into the Peace Corps or do something like work for a major firm that didn’t pay well for the first couple years out of school, the percentage of total income would be quite a bit lower than standard 10-year loan paybacks,” said Mr. Toole, who has commitments for nearly $11,000 so far.

Damn. That is genius. Could innovative the world of higher education financing. This could really help elevate high achieving but financially challenged students to pursue their dreams. I like the idea of a capped maturity period (i.e 10 years).

Post: #14

I might do that for my teacher's certification, it's only 7K