The New Human Marketplace

Markets that let you invest in people are blossoming. But they’re about much more than just getting paid.

Arian Foster and the Houston Texans take on the Tennessee Titans in Week 2 of the 2013 NFL Season in Texas.
National Journal
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Matt Berman
Oct. 24, 2013, 1 a.m.

Let’s say you are think­ing about get­ting a vas­ec­tomy. It’s by no means an easy de­cision to make: Sure, you may not want to have off­spring right now, but who knows how you’ll feel in five or 10 years. In Au­gust 2008, Mike Mer­rill was fa­cing just this pro­geny conun­drum. So he did what every Amer­ic­an in a sci­ence-fic­tion writer’s cap­it­al­ist dysto­pia would do: He ran it by his per­son­al board of share­hold­ers.

It may sound com­pletely crazy, but the kind of sci-fi mar­ket in­nov­a­tion that Mike Mer­rill star­ted dab­bling in when he offered up 100,000 shares in him­self in 2008 is ac­tu­ally catch­ing on.

Take Fan­tex, the com­pany which an­nounced this month that it would sell stocks that will ideally mir­ror the per­form­ance of NFL run­ning back Arian Foster. For that ar­range­ment, Foster re­ceived $10 mil­lion from Fan­tex in ex­change for 20 per­cent of his fu­ture earn­ings. Un­like Mer­rill’s share­hold­ers, people in­ves­ted in Fan­tex would not have any say in what the run­ning back does with his life. Arian Foster, Fan­tex hopes, is just the start.

But this new hu­man mar­ket­place isn’t just about en­ter­tain­ment or one-offs. A new com­pany led by a former Google ex­ec­ut­ive is try­ing to use the in­vestor mod­el to cre­ate a mil­lion new busi­nesses, cre­ated by a mil­lion new en­tre­pren­eurs, fun­ded by mul­ti­tudes of in­vestors. That com­pany, Up­start, al­lows in­vestors to buy a per­cent­age of the fu­ture in­come of a young en­tre­pren­eur-in-wait­ing (or “up­start”) in ex­change for an up-front in­vest­ment.

The way the sys­tem works, an up­start has the op­tion of of­fer­ing up a 5-year or 10-year agree­ment with in­vestors. Up­start’s pro­pri­et­ary for­mula fig­ures out how much a piece of each up­start is worth — based on, among oth­er things, aca­dem­ic re­cords and job his­tory. (Note to eu­gen­ists: Race isn’t factored.) From there, it op­er­ates much like Kick­starter: You get a little back­ground on who the up­start is, what the per­son’s short-term goals are, and what pie-in-the-sky goal that per­son car­ries. And, of course, how much money the per­son is hop­ing to raise. Eight to 12 back­ers per up­start is the ideal, al­though some up­starts have more than 40. The av­er­age back­er, in an Up­start-re­com­men­ded bid to di­ver­si­fy, funds 5 to 10 up­starts. In­vestors are paid by the month, based on the up­start’s earn­ings for that month.

Arian Foster is giving up 20 percent of his future earnings to Fantex. (Houston Texans) National Journal

So far, 170 people — from craft-brew dream­ers to cy­ber­se­cur­ity de­velopers — have been pub­lished on Up­start’s web­site and are either fun­ded or ready for in­vest­ment. That’s out of thou­sands of people who have ap­plied, the vast ma­jor­ity of whom don’t meet the com­pany’s stand­ards. In­vestors are bit­ing: There are 250 back­ers, and a total of $2.5 mil­lion in trans­ac­tions and 1,200 unique of­fers from back­er to up­start.

“Up­start was foun­ded by an ob­ser­va­tion that there’s a lot of people early in their ca­reer that lack for ac­cess to cap­it­al,” says CEO Dave Gir­ou­ard. As Gir­ou­ard sees it, the “choice pal­let” for re­cent col­lege grads to fund their new start-ups was “pretty bare,” and needed some im­prov­ing.

He has a point. These aren’t boom times for young 20-somethings. Ac­cord­ing to the New York Fed, the un­em­ploy­ment rate for 22-year-olds leaped from 4.5 per­cent in 2000 to 10.3 per­cent between 2009 and 2011. Nearly half of re­cent col­lege gradu­ates are work­ing in a job that doesn’t ac­tu­ally re­quire a col­lege de­gree, ac­cord­ing to a Janu­ary study from the Cen­ter for Col­lege Af­ford­ab­il­ity & Pro­ductiv­ity. Col­lege gradu­ates from the class of 2013 had an av­er­age of $35,200 in debt.

But Up­start isn’t all an­gel in­vestors and bubblegum. There is something in­her­ently un­com­fort­able about wealthy in­vestors — some of whom may chose to be an­onym­ous (al­though up­starts get fi­nal ap­prov­al of all back­ers) — buy­ing the fu­ture in­come of hope­ful, but un­sure, en­tre­pren­eurs. Es­pe­cially if that in­come winds up be­ing much lower than any up­start dreamed of. If an up­start’s plans fall through, it doesn’t feel too great for a per­cent­age of her mea­ger in­come to still be owed to well-off in­vestors.

Up­start tries to guard against this by cre­at­ing unique in­di­vidu­al thresholds at which point an up­start wouldn’t have to pay a per­cent­age of their in­come. So, for in­stance, if an up­start is mak­ing something near min­im­um wage an­nu­ally, she wouldn’t have to make a re­pay­ment for that year. In ex­change, ad­di­tion­al years — up to five — are ad­ded onto the end of an agree­ment. So a 10-year agree­ment with some down years could ex­tend to 15 years, or a 5-year deal could go to 10.

But this kind of setup can get even more eth­ic­ally hazy with something like Fan­tex’s Arian Foster series, where, as Re­u­ters’ Fe­lix Sal­mon points out, you have pre­dom­in­antly wealthy white men buy­ing pieces of a black man’s fu­ture. And in a phys­ic­ally gruel­ing sport like foot­ball, the his­tor­ic­al par­al­lels aren’t too cheery.

Arian Foster's been struggling with a hamstring injury since the Fantex news broke. (Houston Texans) Houston Texans

But the real be­ne­fit of the hu­man mar­ket isn’t ne­ces­sar­ily in the money, either for in­vestors or the hu­man in­vest­ments. As Mike Mer­rill puts it, the true value is in the de­cision-mak­ing en­gine that the mar­ket cre­ates.

Mer­rill’s ex­ample is ex­treme. Since 2008, he has put migh­tily per­son­al de­cisions to his mass of share­hold­ers on his ex­change site, KMikeyM. “Ba­sic­ally, my rule is, any­thing I would nor­mally ask my friends for ad­vice for, I’d go to the share­hold­ers and ask ques­tions there,” Mer­rill says. Some of what Mer­rill puts up for a vote is a bit tongue-in-cheek, play­ing on the idea of be­ing Mr. Cap­it­al­ism — which is why he re­gistered as a Re­pub­lic­an (while still en­dors­ing Pres­id­ent Obama in 2012) and for some time ex­clus­ively wore Brooks Broth­ers cloth­ing.

But there are also plenty of de­cisions that im­pact Mer­rill’s life in a real way. Grow­ing a “winter mus­tache” was voted down in the fall of 2008. A 735-day re­la­tion­ship re­new­al agree­ment was ap­proved in June. Per­haps most spook­ily, in Janu­ary 2012 Mer­rill’s share­hold­ers over­whelm­ingly voted to split his $100,000 life-in­sur­ance policy in the event of his death.

Which raises a ques­tion: Could Mike Mer­rill’s share­hold­ers vote for him to com­mit sui­cide? Mer­rill says the ques­tion comes up every now and then, but if it was ever ac­tu­ally voted on and ap­proved, he wouldn’t obey. “I ul­ti­mately choose what goes up for a vote,” Mer­rill says, and he’s be­hold­en to his share­hold­ers just “as much as I want my share prices to be high.” Pre­sum­ably, if Mer­rill dis­obeyed an edict from his share­hold­ers, his share price (now hov­er­ing around $9) would tumble. It’s not in any­one’s true eco­nom­ic in­terest to vote to kill Mer­rill.

With no mar­ket fail­ures, Mer­rill’s ex­per­i­ence as a pub­licly-traded per­son has been mostly pos­it­ive. And it ac­tu­ally serves as a strong ex­ample for pro­spect­ive up­starts.

Take a big re­cent ex­ample from Mike Mer­rill’s de­cision-mak­ing en­gine. This March, he posed a ques­tion to his share­hold­ers: Should he quit his day job to start his own busi­ness? Mer­rill him­self wasn’t so sure of the idea, as it ob­vi­ously takes quite a big leap to leave your job and go out on your own. But the share­hold­ers over­whelm­ingly ap­proved of the move; only one per­son with one share voted against it.

In that way, the mar­ket serves as more than a quirky way to raise money (Mer­rill says he’s made no per­son­al profit, but share price has slowly climbed over time). The share­hold­ers’ de­cision on Mer­rill’s ca­reer move was a “huge boost of con­fid­ence,” and it made it easi­er for him to ac­tu­ally leave his job. Just with one quick post on KMikeyM, Mer­rill had the kind of massive sup­port net­work for an emo­tion­ally tough de­cision that most people would kill for.

Up­start aims to get in on some of this. While no Up­start in­vestors are go­ing to be vot­ing on the per­son­al lives of their in­vest­ments, the com­pany has a built in a kind of so­cial net­work for back­ers to in­ter­act with up­starts. Up­start CEO Dave Gir­ou­ard thinks this is really what will make his com­pany suc­ceed. “If you sur­veyed up­starts … al­most to a per­son, they will say, ‘the money’s fine, but what is really valu­able here is the sup­port I get from my back­ers.’” This makes some in­tu­it­ive sense. Up­start’s in­vestors have the kind of brains that start-up hope­fuls would love to pick. They count, among oth­er high-pro­file names, mul­tiple Google ex­ec­ut­ives in their ranks. Peter Thiel, Eric Schmidt, and Marc Benioff have put nearly $6 mil­lion in­to the com­pany it­self.

Gir­ou­ard’s as­sess­ment makes Up­start seem a bit more like Mer­rill’s de­cision-mak­ing en­gine and less like a tool of blood-hungry bil­lion­aires. “We were nev­er in­ten­ded to be a new-fangled bank,” Gir­ou­ard says, “but really a net­work of people who are en­gaged in and in­ter­ested in each oth­er’s suc­cess.”

It’s too early to say that Up­start will be suc­cess­ful, or if pub­licly-traded people like Mike Mer­rill and his share­hold­ers are really a mod­el for a new kind of mar­ket-based com­munity. But the in­terest is there. It’s just a mat­ter now of the mar­ket’s ideal­ism not spiral­ing in­to Philip K. Dick’s night­mares.


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