OT: Arian Foster to IPO himself

Submitted by joeyb on

http://www.theatlanticwire.com/business/2013/10/nfl-running-back-arian-foster-stock/70653/

Basically, he has partnered with a company to sell $10.5m worth of shares in his future performance. He gets $10m of that, but he then 20% of his future earnings go to shareholders. Think of it as an insurance policy in case he has a serious injury next week.

At first I just thought this was a cool idea and was going to move on, but then I thought, "Could something like this be the solution to paying student athletes?"

What if student athletes were allowed to setup their own company in their name. They work with a company like Fantex to setup the details of the IPO for the player/company. Companies like EA then pay the dividends to the company. Even without money from  companies like EA, the player probably has enough money from the IPO to make it through college. As money is deposited into the company, 20% gets distributed to shareholders. The player can then withdraw a limited amount of money each year per NCAA rules before they are deemed "professional". Maybe that means that the scholarship and earnings can only total $65k/year or something like that. Once the player graduates or leaves school for any reason, he is free to withdraw money as he pleases.

A couple of things that would make this work, I think:

  • It makes a player's decision to come back for another year easier if they know that they have some money waiting for them either way.
  • While 3* athletes might not get $10m in an IPO, they could still set one up as a freshman and people might gamble on some of them to hopefully get large returns by selling stock later when they become starters or when the player makes it to the pros and starts sending dividends to the investors. Imagine having bought stock in an unknown Mike Hart and then selling his stock after his Junior year. You could have made a lot of money off of the prospect

What does everyone think about this idea?

JeanClaudeVanD…

October 17th, 2013 at 4:47 PM ^

Initial IPO's usually drop shortly after going public due to investors figuring out non-GAAP accounting measures (see Twitter). Any potential Arian Foster investors I would encourage to wait until after he goes public. Chances are shares prices will drop.

highestman

October 17th, 2013 at 5:04 PM ^

I know someone who works for the SEC, he said they did not want to have this happen. I'm very suprised it did. All the risk is placed on the investor - Arian already has his money, Fantex gets their money back through the IPO (and probably takes a fee along the way). All the risk thats left is on the investor.

WolvinLA2

October 17th, 2013 at 5:22 PM ^

Not really.  He's only giving away 20% of his future earnings, so he still have a lot of reason to keep making money. 

Though this would be a very unique stock in that it's only real benefit is the dividend.  Very rarely do you invest in a company knowing that in 10 years it will be out of business, possibly well before that. 

joeyb

October 17th, 2013 at 5:33 PM ^

This is true for current players. However, players that are drafted in the later rounds could do a smaller IPO. Initial investors could then sell his stock near the end of his contract year for a profit. The next investor would then have to weigh the higher value vs. how long they think the player will remain in the NFL. RBs are probably the worst long-term investment, but elite QBs  and/or WRs could make you a lot of money in the following 5-15 years, especially if they are blowing up in their contract year.

highestman

October 17th, 2013 at 5:33 PM ^

I didn't say he didn't have reason to keep making money. I said the risk is on the investor. The only "risk" for Arian is that 20% lifetime earnings ends up > $10M, in which case he left money on the table. If he makes less money, then this transaction would actually net him a profit. I'm not saying Arian does not have his incentives to make money; I'm saying that in this transaction the only person holding risk is the investor. If Arian gets injured next year he profits b/c he already has his 10M (which is now possibly >20% future earnings), Fantex already got its money back through the IPO, but the investor now has a worthless stock. When a Company IPO's, its not normal that they also shed all risk with it.

I do agree that from a normal investment perspective it makes no sense to invest in something that you know has about a 10 year life, especially when the majority of the revenues are up front. Stock price is based of the net present value of future earnings. Assuming Arian has 10 years left (absurd for a running back, but just for example), after just one year, I would say much more than 1/10 of the total future earnings potential is gone. How on earth would the stock price ever rise in a scario like that? 

WolvinLA2

October 17th, 2013 at 5:47 PM ^

But like you said yourself, he does have financial risk because if he makes more than $50MM in his career, he loses money.  That's unlikely in my opinion, but it's still risk.  If NFL pay makes a solid increase between now and the end of his career or if he becomes a media darling and starts getting big endorsement deals, this would be a net loss for him. 

Now, I agree with you that the shareholder has a lot more risk.  But to say they have all the risk just isn't true.

xxxxNateDaGreat

October 18th, 2013 at 12:35 PM ^

If I'm going to invest in any player, it most certainly won't be a running back. In the three years at starter before the current season, Arian Foster has averaged a whopping 371.7 touches during the regualr season alone. This year, he is on pace for... 371 regular season touches.

There have been several articles written about this (mostly from a fantasy football angle) but this one is probably the most in depth. Long story short, the results are mixed, but trending negative. Also, average career for RBs is 3 years, blah blah blah, this is not a safe investment.

LSA Superstar

October 17th, 2013 at 5:34 PM ^

I need to think about this, but I can't decide whether it's crazy or brilliant.

I also really like the suggestion about the NCAA athlete solution, but - again - I'll need to think more about this.

ChiBlueBoy

October 17th, 2013 at 5:44 PM ^

In essence, it's hedging against future loss by limiting future gains (modestly). Another way of doing this is good, old-fashioned insurance, which NCAA athletes, I believe, are able to also buy. I would suggest increasing the ability of college athletes to buy larger policies of insurance. That way, you don't have some of the concerns that come with having investors (e.g., quarterly calls where you have to explain why you're returning to school for your senior season, or, as noted above, someone shorts you and runs you over with a truck, or pays a LB to give you a little extra mustard at the bottom of a pile).

BTW: sometimes old solutions still work. In the 60's, my father insured his hands for $1M with Lloyd's of London. A large sum at the time. His occupation--hairstylist.

WolvinLA2

October 17th, 2013 at 5:50 PM ^

There are insurance policies that insure against injury (and many players have them) but not against "just not being that good anymore," to my knowledge. 

One great thing that this insures against is if Arian Foster makes a steady decline over the next three and a half seasons (what's left on his contract) and after that can't find a job (he'll be 30) he'll have made himself an extra $6 million or so.  Even more if he gets cut before his contract is up.

ChiBlueBoy

October 17th, 2013 at 6:18 PM ^

I'm still not sure that an IPO is the way to go, however. Why not get another form of quasi-insurance, e.g. some sort of hedge vehicle? As long as the payoff on the hedge is less than the payoff for success, he's got a floor under his potential future suckiness and still plenty of incentive to succeed without having to answer to "owners" of your stock (i.e., on-field performance).

ESNY

October 17th, 2013 at 7:10 PM ^

This is more of a reverse mortgage on his career than insurance (or if you want to be morbid - a sort of life settlement situation).  Not sure you can buy insurance to cover normal wear/tear or obsolecence. 

In a reverse mortgage you take equity out of your house and get cash upfront to be paid off when you or your estate sells your house.  He is essentially taking a cash advance from future earnings which will only be repaid when he gets his next contract (NFL or endorsements).   If he doesn't make money to pay it back, the writer of the reverse mortage is out of money

joeyb

October 17th, 2013 at 5:50 PM ^

What would be the point of having a quarterly call? The investors have no say in how he handles his business. If it's required by law, then have a representative from the IPO company hold the meetings for the investors just to go over the information for all contracts that have been signed and whatnot. The player doesn't even have to be on the phone.

ChiBlueBoy

October 17th, 2013 at 6:15 PM ^

I didn't mean to be literal there. A bit tongue-in-cheek. However, the concern that he would now have a responsibility to his shareholders is real. If he signs a contract with a bad team with no OL (cough *Jacksonville* cough), can the S/Hs bring a shareholder action for not protecting their investment? This situation is ripe for potential conflicts of interest. Immediately, if he turns out to be a bust, he's already got his payday.

BlueAggie

October 17th, 2013 at 6:06 PM ^

Somebody tried to do this with minor league baseball about 5 years ago, but the MLB quashed it. The concept there was that non-bonus prospects often have to work winter jobs to makes ends meet. The investors were essentially paying for the player to train year round in exchange for a cut of future earnings. I was very disappointed to have my $50 refunded. It seemed like a cool way to help a player pursue their dreams, and also develop a rooting interest in low level baseball.

Edit:
Found a story on it:
http://www.nytimes.com/2008/02/01/sports/baseball/01minors.html

I guess it was $20, not $50.

Farnn

October 17th, 2013 at 5:59 PM ^

Would this be illegal under current NCAA rules?  They are allowed to take out insurance in case of career ending injuries, this doesn't seem much different.

joeyb

October 17th, 2013 at 6:03 PM ^

Yes. I looked at the rules and they are not allowed to accept a salary or any other form of money related to their athletic abilities. They also can't sign a contract for anything, including promise of future pay, pertaining to their athletic abilities. So, the rules would have to change in order to allow this to happen.

bluins

October 17th, 2013 at 5:59 PM ^

This only breaks even when he makes $50 million. He's a 27 year old who got a $43 million contract, with a $12 million bonus last year. That $12 million is off the table for the investors because it was paid up front. Figure he'll be 32 or so when that one is up. Running backs don't have much longevity. He may get a few million a year after this contract is up.

He wouldn't be doing this if the numbers don't make sense for him, and they certainly do here. He's getting $10 million, in present dollars, in exchange for giving up something less than that in future dollars. Unlike a traditional IPO this one only works out for the AF - not much upside for the investor. Even assuming he does get another huge contract, the investor would, at most, double his investment. I don't even think that is worth the risk.



 

WolvinLA2

October 17th, 2013 at 6:19 PM ^

He'll be 30 when his current contract is up, but I agree with your overall point.  Keep in mind that this includes all income, not just income from the NFL.  I'm assuming that if he becomes a spokesperson or an analyst or a coach down the road, that income would be split as well.

snarling wolverine

October 17th, 2013 at 6:06 PM ^

Regarding college players doing this, Isn't this just a more sophisticated version of what Ed Martin was doing?  He laundered his gambling winnings onto players in the expectation that they'd pay him back if they made it.  I'm not sure why the NCAA would look any more kindly upon this.

ChiBlueBoy

October 17th, 2013 at 6:27 PM ^

When gamblers do something, it's crass, base and vice.

When Wall Street does something, it's pro-business, entrepreneurial and the essence of free enterprise.

If you still don't understand, just repeat it to yourself over and over until you agree that the SEC is over-reaching and regulations always a drag on our economy.