The Human Equity Market
- Posted by Leigh Drogen
- on April 2nd, 2010
If you follow me on Twitter, you may have read one or more of my late night alcohol induced rants regarding what I like to call “The Human Fund”. What is the human fund you ask, just sit back and prepare to be blown away.
About a year back, a few friends and I started joking around in a bar about the possibility of selling equity in ourselves in return for cash right now. It started out as a joke, we imagined a whole market based on buying and selling equity in people, derivative products which would allow you to offset the risk of your investment and allow the market to grow, who would likely be involved, and what the obstacles were. It was all in good fun, something for us to argue about, place stupid little prop bets on, and heckle each other over (I would pay 10 bucks for you dude!, hahahaha). Yes, my friends and I are a bunch of complete dorks, and there may be a few evil investment bankers among us.
But as time has gone on, the joke has become more and more of a reality. In early March, Venture Beat ran an article about a Stanford University graduate who is looking to sell 6% of her life’s income for $600,000. You can read the complete article HERE. I won’t go into the whole article, you should go and read it on your own, it’s very interesting. The reason I bring it up is because this is going to happen, people are going to begin selling equity in themselves, it’s only a matter of time.
Having a father who works for one of the most prominent law firms in the country, Baker Hostetler, does have its perks. I have begun the process of speaking to a few of his colleagues in hopes of learning more about how this idea may become a reality, what the legal hurdles are, and how to structure these deals.
Let me lay out the idea for you in a very simple way. Let’s say I am a high achieving 22 year old Stanford University graduate who is looking for a job. Similar to a start up company, I’m not only looking for cash to get my business started, I’m looking for partners to help me along, give me guidance, share contacts, and have a stake in my success. As the individual, I would be selling a portion of my after tax income for a negotiated period of time in return for cash, or something else, the possibilities are endless. The investor is looking to buy an asset which they believe is under valued or which they can have some impact on helping to appreciate, similar to a venture capitalist with a young company.
Now, at this point you probably have a million different questions, grievances, things you’d like to shout at the computer screen, and money you’d like to invest in me (that was a joke i’m not selling myself). This is definitely a half baked idea for sure, and when I write this I am only half serious that this may work and should become a reality. There are many moral, legal, philosophical, and economic hurdles to this becoming common on a larger scale than just a few people. But, that being said, I believe it’s an excellent idea, one that I will continue to explore.
Over time I have sketched out a whole market dealing with human equity, but today I want to share with you just one aspect of that market having to do with education. Currently, our secondary education system is broken. An undergraduate degree, even from a top university, does not guarantee you a well paying job. The cost of attending a top private university has skyrocketed, in some cases costing more than $50,000 a year. That’s $200,000 at least for an undergraduate education. Given that the school has no responsibility to secure you a job, you are taking a huge gamble with that investment in yourself. I won’t run through the math here, but I think you can see the point I’m trying to get across for someone making $45,000 per year for a few years after spending that huge sum on tuition. The math just doesn’t add up people, the system is broken and something is going to change.
There is certainly a bubble in the price of secondary education, and it seems that every day you get less and less for that money, especially in an economy where jobs are so scarce, even for those of us with the highest education. So here’s what I’m proposing. Instead of the student paying tuition, in some cases I believe it may be better for certain schools to buy equity in their students in return for their education. Here’s why.
For the student, there would be no more worrying about paying for college, no more working three jobs while going to school, no more taking out loans which will strangle you for years and years to come. Hell, Obama wasn’t done paying off his loans when he ran for the senate the first time! The student also gets an educational institution which has a stake in their future, not just for the purpose of the institution’s popularity or stature, but a direct economic incentive to see the student succeed after graduation. Yes, there are plenty of moral issues concerning what the student studies, how the institution selects students, on and on, remember, this is a half baked idea, we can discuss those later. Along with the education, I would imagine that the institution would do its best to help that student progress through their career.
For the educational institution, they get students who are extremely motivated to get the most out of their education, given the fact that they will be paying for it with a portion of their earnings for the rest of their life or some set amount of time. Drop out rates would plummet. The institution would also be in a position to financially benefit from its own success in educating its students, where does that take place now besides alumni donations?
The point I’m trying to make here is that secondary education institutions need to be more incented to both provide their students with practical educations which give them skills for the modern economy, and help them acquire those jobs after graduation and throughout their careers. I see this as being very similar to the venture capital model, where the investing firm mentors the young entrepreneur and has a stake in their success, I’m not trying to reinvent the wheel here.
There are many issues of moral hazard that must be overcome, I have a long list, and the legal ways to fix many of them.
I’ve got a million more applications for this human equity market, many would fix inequities in how certain aspects of our society work. Yes, this is a half baked idea, but I am 100% undoubtedly certain we will human equity sold as a normal thing within 10 years, just read the article above, it’s already happening! Am I looking for partners to run with this idea, sure. But really I’m just looking to have a conversation right now, what say you?
Update: A big thank you to Matt Cope for providing this link which goes into great depth on the human capital for education market. I can’t believe this hasn’t been done yet, please read! http://www.cato.org/pubs/pas/pa462.pdf
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Leigh Drogen is the founder and chief investment officer of Surfview Capital, LLC, a New York based investment management firm employing an intermediate term long/short momentum strategy. More »
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