Investing in Superstars, part 4

[NOTE: I updated this post with more detailed examples]

Background: part 3part 2 and part 1.

In the interview with Jon Gunn in Part 3, I mention that I’ve been thinking of what “version 2” of the Personal Investment Contract might look like.  Here’s the model:

  1. Investment Amount – Same as before, intended to give the individual some time to pursue their passion (or figure out what that is) without having to worry about how to support themselves.
  2. Maximum Return – The cumulative total amount that the investor can receive as return on their investment.  If and when this amount is reached, the contract is over.
  3. Annual Exclusion – The amount of annual income the entrepreneur can make without having to share any of it with the investor.
  4. Minimum Revenue Share – The minimum percentage of gross income the entrepreneur returns to the investor after deducting the Annual Exclusion.

Following are some examples of various different career paths and uses for a PIC.  Click on the thumbnails to expand the graphs.  These are modeled with various “reasonable” assumptions but if you want to experiment with how it might apply to you or under different assumptions, here’s the spreadsheet.

Example 1: Entrepreneur

  • Investment Amount: $50K
  • Maximum Return: $2M (i.e. 40x )
  • Annual Exclusion: $100K
  • Minimum Revenue Share: 25%

Example 2: Social Innovator

  • Investment Amount: $100K
  • Maximum Return: $1M (i.e. 10x)
  • Annual Exclusion: $50K
  • Minimum Revenue Share: 30%

Example 3: Small Biz Expansion

  • Investment Amount: $300K
  • Maximum Return: $1.8M (i.e. 6x)
  • Annual Exclusion: $0
  • Minimum Revenue Share: 40%

Example 4: Career Change

  • Investment Amount: $1M
  • Maximum Return: $4M (i.e. 4x)
  • Annual Exclusion: $200K
  • Minimum Revenue Share: 60%

Example 5: Investor

  • Investment Amount: $3M
  • Maximum Return: $300M (i.e. 100x)
  • Annual Exclusion: $250K
  • Minimum Revenue Share: 100%

Several things to note: the Minimum Revenue Share is calculated from the gross income (all sources) as reported on your tax return; you get to deduct the Annual Exclusion amount before figuring and paying taxes.   If your effective income tax rate is 40% and you quit your job — using the Investment Amount to live off of — you’ve just stretched out your runway by 40% (i.e. you don’t pay taxes on the money someone invests in you).  Finally, this contract gives you incentive to pay more than the Minimum Revenue Share to your investors, since the more you return, the quicker you reach the Maximum and end the contract.

  • I remain a big fan of this concept and think you are taking it in an interesting direction.  One quick note:

    I’m not sure the investee has any incentive to pay more than the minimum – since the return is capped either way, I imagine their incentive would be to pay the investor the minimum and preserve existing cash resources.

    If you wanted to create an incentive to pay back early, you could increase the maximum payout a nominal amount yearly (1%?)

    • Rafe Furst

      I hadn’t really thought too much about truly incentivizing early payment.  I figured if the investor is happy with the minimum then that’s fine.  But you are right, having explicit time premiums would do the trick!

  • Naturodoc

    Off topic- I read your post about vitamin D and wondering if you had more info on the name of the test you did for Functional Vitamin D Efficiency?

  • Danielih

    If you can share the data in a more accessible format I would appreciate it. .XLS might work. 

  • I’ll do the Career change Million dollar investment if there are any takers

  • Fulltiltplayer

    What about stealing ten million from poker players on Full Tilt? What has your return been on that money with this website and investing in entrepreneurs, etc.?  You better start divesting you scumbag.

  • Tiny

    Thanks for taking our money Mr.Furst, hope you enjoy prison.

  • Laura Edwards

    Like to see a category for Catalysts and a way for Investors to extend the bet ( or have the option) by accepting equity up to a point as it’s easy to see all of these various profiles getting involved in interesting projects. How do investors recoup if those individuals take a j-o-b for a few years?