Investing in Superstars, part 3

For the background to this post, start with part 2 and part 1.  The follow up is part 4.

I get a lot of questions from folks who are interested in learning more about Personal Investment Contracts and so I felt it was time to synthesize some of the most common ones and give you some answers.

Who is the first person you invested in?

A film maker named Jon Gunn.

What is your relationship with Jon outside of this investment?

He is my brother-in-law, and a former business partner of mine in an instructional DVD company we co-founded with Phil Gordon.  I’ve also invested in a couple of his independent films.

Why did you invest in Jon directly?

I have been a big believer in his talent for a long time.  None of the ventures I just mentioned though have made me any return on my investment.  Phil had been suggesting for a while that if we simply invested directly in Jon’s future earnings, we’d do better than investing in his projects.

Why is the contract only three pages if it’s a lifetime deal?

Basically it comes down to this:

1. The contract is there simply to remind both parties of what was agreed to at the time of signing.
2. Inevitably circumstances change for one or both parties and it will be necessary to amend the contract.
3. If both parties are committed to maintaining a strong relationship, then amendment is easy and actually leads to strengthening the underlying relationship.
4. On the flip side, if one or both parties are stuck in the past and are not looking for the continued win-win, it ends in lose-lose (i.e. litigation).
5. If you can’t trust each other to honor the spirit of the agreement when conflicts arise, is a longer contract going to make matters better or worse?

Are there legal and tax consequences you had to consider?

Yes.  It turns out a three-page contract is way more complex than a 30-pager.  If you are considering doing anything like this and want to deviate from the contract template, I recommend contacting Orlando Medina who created the contract and vetted all of these issues.  There are very few lawyers like Orlando who are both legal virtuosos and business-creative rolled into one.

Why not create a fund for Personal Investment Contracts?

Most investment funds are explicitly meant to remove the personal relationships that a PIC relies on.  While not explicitly a PIC fund, the Presumed Abundance fund is based on the premise of investing in people and relationships.

Another approach that might work is to attach a fund to an incubator like TechStars or a fellowship program like the TED Fellows.  The incubator then acts as a proxy for that personal relationship: both investor and investee feel a sense of responsibility to the third party, which can also act as an neutral arbiter if problems arise.

Have you made an equity investment in anyone else besides Jon?

Yes, Michael Keller.  He was a founding partner in the instructional video company (along with myself, Phil and Jon).  Michael and I have been friends for years and I had also invested in one of his movies.

Do you only invest in film makers, I thought you were into technology and social entrepreneurship?

The film connection is somewhat coincidental.  Michael is working on a startup in stealth mode right now.  I’ve talked with a few close friends who are tech/social entrepreneurs about investing in them but the conditions just haven’t been right.

Would you invest in me?

Not unless we’ve known each other for several years and have been through some experiences together that have tested our relationship.  We need to know that we’ve got each other’s back, and are committed to working out problems that arise.

What’s more important to you as an investor, trust or talent?

No question: trust.  I truly believe that “talent” is within us all, and by removing obstacles (financial and otherwise) we can unlock that talent.  That said, not everyone is at the point in their lives where lack of money is the real obstacle.  In fact, very few people are, even though we’d all like to believe otherwise.

So if money isn’t the real issue for most people, what is?

It’s different for every single person, but what I see most often is that there is a tricky balance between the drive/confidence to achieve lofty goals on the one hand, and the courage/commitment to personal development, growth and learning on the other hand.

How have your personal investments turned out?

From an ROI perspective for me as the investor it’s too early to tell (it’s been two years since the first one).  But from an interpersonal standpoint, my friendships with Jon and Michael, it’s been incredibly positive for me so far.  To give you insight into Jon’s experience, we recorded this:

Alternative Institutions, Creativity, Happiness, Health, Incentives, Innovation, Interventions, Investing, Psychology, Scarcity / Abundance, Social Capital