Kill Debt by selling pieces of yourself

debt

Student Debt is crippling

Student Debt has crippled new students coming out of expensive private universities in the United States. Instead of taking risks, students have to figure out how to cover their expenses including this massive debt. Even with the current loan forgiveness program, student debt causes new minds to be more risk averse.

How do students with a great idea, but with poor parents get their innovations out there? How can they raise equity when they are saddled with debt? The old way of venture capital with many many gatekeepers, Ivy League educations, and polished Powerpoint decks might be one way. But now regular people can raise capital just like companies do. How? They sell pieces of themselves, in the form of shares, like stock. 

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A new model by the Liberman siblings

The Liberman siblings have done such a thing. They started off developing video games in Russia, then after that failed, moved to Hollywood, then took a gamble with technology, which paid off leading to an acquisition by Snap. Instead of cash, the siblings took shares and when Snap stock hit $60 the family left. They put all of their assets together and started selling it off. 

Quick finance lesson

The market is based, in theory, on a company’s future cash flow, where future earnings are discounted by some interest rate. (Hence when the Fed raises interest rates, stock prices go down.)  The number that is derived is then multiplied by a price to earnings ratio and hence you have a stock price. (This is an oversimplification of securities analysis, but hopefully it makes some kind of sense). 

A person’s net worth, however, is simply assets minus liabilities. There’s no anticipation of future earnings, and hence no price to earnings ratio. (If we assume that earnings are undefined or zero then you have a divide by zero error, or undefined). 

In theory, yes, you could just stop working tomorrow. A company could do the same. Yet we assume because a company is much more complex that it won’t. A human could just quit and say Sayonara and spend all their money on a trip around the world. 

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The Libermans are saying that they have a track record of doing things, and hence they won’t just quit and travel the world. Thus, you should give them a price to earnings ratio in addition to valuing the current income generating assets they have. 

There have been some other companies out there that have sold off a capped amount of future earnings to private individuals but they seem to have failed as that seemed to be a kind of convertible debt instrument. Could straight equity be the answer to the student debt crisis?

But … will this work today?

Possibly. However, we run into many regulatory issues and even if we limit the investors to those that are accredited (meaning that they know the risks they are getting into and can afford to take a loss, quantified as earnings 200,000 or more per year or having liquid investable assets of more than 1,000,000). How would this work? What would the due diligence be on this? Could I really invest in someone that I don’t know? 

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Venture capitalists invest in people that they know. Why? Because it’s easier to walk away from my money than it is to walk away from your own. However, if there is a social stigma attached to it (i.e. losing your best friend’s money) it is much harder to walk away. However, if that money was nameless and faceless, it is ripe for fraud (notice the number of fraudsters associated with the Covid PPP funds). 

This is a very cool idea, and it’s something that we will keep an eye on, but for now, don’t think that you can sell off your future potential home run Google-type idea that will make a future gazillion dollars for the low low price and valuation of a billion.

What are your thoughts on this? Have you tried to sell off your future potential to investors (i.e. friends and family)? What did they say? Drop us an email and let us know!

Kill Debt by selling pieces of yourself via @famecastmedia

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