z on life

Let’s say you’re a brilliant hacker or any other breed of wild intelligence. You’re young, maybe high school, college, or shortly after, and show the potential to achieve enormous success and to make huge sums of money. You haven’t made it yet, though, so you haven’t hit a state of financial security and would obviously like to have more money than you do. You may need money to pay off college, or to quit worrying about paying the bills so you can focus on being entrepreneurial, or just want a bit more of a comfortable life now and pay it off later. So, if you’re in this scenario, would you sell life equity?

What exactly I mean by life equity is the following:

1. You find someone interested in your potential.
2. They give you X dollars up front.
3. You give them in return Y% of your earnings every year for life.

There’s lots of ways to do this like allocated the money in tranches subject to performance, a variable percentage of future earnings, etc. But let’s keep it simple. If a benefactor wanted to give you $1MM right now for 10% of all future money you made, would you do it? If not, what if it was 5% or even 2%? If yes, what if it was 20% or even 50%?

The pros:

1. You can stop worrying about baseline finances.
2. You can earn interest on the money you now have in the bank.
3. You can engage in ventures without seeking early external funding.
4. You can spend money to alleviate stress and increase professional performance.
5. You can get career help from your benefactor who has a vested interest in your success.
6. You can do things, go places, and help people you couldn’t before.

The cons:

1. If you’re really successful, you actually end up losing money on the deal.
2. Every year you have to think about how you traded a one-time gain for an annual loss.
3. If structured wrong, you may have incentive to do nothing after getting the money.
4. Being able to do anything you want is hugely distracting and a career detriment.
5. You are accountable to your benefactor for returning good money to him or her.
6. You now have a much weakened sense of urgency to go far in your career.

So would I do it? The truth is it depends on the numbers. A good deal is a good deal, and certainly money at different points in life has a different value, and for most people that utility curve is monotonically decreasing so money up front can be a rational choice. On the other hand, there is something special about making it on your own, not having things given to you, and having complete control. It should be the process of building success, not the financial reward itself, that is valuable in life. If you’re confident in yourself and have the basic necessities to live, I think the answer has to be no. So would I do it? Probably not, unless the deal was really good.

Cases where I think it does make sense:

1. The person is in abject poverty but shows huge potential. Even if it is just to pay for college, the money could make a huge difference.
2. The cash infusion can raise the expected career value of the person more than the annual percentage payment. This is like the minor league baseball player that recently wanted to do this very thing so he could practice instead of working two side jobs.
3. The person has a valid time-sensitive reason for needing money. Maybe it concerns the health or wellness of a family member or something else where the money loses its value sharply as time goes on.

But before the notion of ‘life equity’ could ever became a common financial product, there’s a couple things that need to be worked out:

1. How do you price such a risky and variable future cash flow?
2. Does equity lead to ‘voting rights’ for life decisions?
3. Is this purely financial? If not, how would intangible achievements (ie: Nobel Prizes) be split up?
4. What are the ramifications of people holding stock in others? Suddenly there can be a quantifiable benefit to favors and business relationships. Would this corrupt the flow of business dealings?

I am not sure this concept of life equity will ever exist above and beyond a few one-off cases. I have been told it has been tried in the past for very special scenarios and has not worked out (I don’t know when and where, but I am looking into that now). If it did, though, would you sell part of yourself? For how much and with what terms? It’s very interesting to think about. I’d love to hear some thoughts.

Tags: Career, Money, My Life, People, Self-Advancement, Success

This entry was posted on Tuesday, April 22nd, 2008 at 9:53 am and is filed under Main, My Favorite Posts. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.