The Time I Thought I Invented ISAs (Income Share Agreements)

In December of 2017, while Bitcoin was skyrocketing to its still-standing all-time-high, I was writing an email. The "To" box was filled with the name of an alumnus of the school from which I had graduated seven months prior. I was in my first year of banking and hardly had time for anything extracurricular, but I have always had time for ideas. At this time, I thought I had a good one. I was writing to this alumnus because he was Head of Executive Talent at a top VC firm and I had an idea I wanted to share with someone who might get it, want to invest in it, and be able to help me. This person fit that mold. I told him in a cold email that "I have been sitting on an idea related to your expertise in executive talent that I would very much appreciate your perspective on." He asked me for the details over email. I have copied that email below:

[Name],

Thank you very much for the quick reply. I really appreciate your willingness to help and we can certainly start over email.

I understand that you are extraordinarily skilled at identifying talented business leaders. The success of my idea would depend entirely on that skill, and that is why you are the first professional with whom I will be sharing the idea.

A few months ago, I got to enjoy my first taste of being on the interviewer side of the table while interviewing aspiring interns and first-year analysts for our group. I very much enjoyed the experience, and I actually received unsolicited feedback from a couple of candidates saying more or less that they felt the interview really got to the core of who they were as individuals (see questions attached if interested). I was glad to learn that my top two interns were the two that were given offers, but when the prospective first-year analyst that I liked best for the one available full-time position was passed over in favor of another candidate, I was surprised by how confident I felt that she (the non-offered candidate) would have a very successful career regardless. I thought -- if this girl was a company, I wanted to invest. 

From that thought, came this idea.

If you will give me the benefit of the doubt that there are a large number of college graduates who have a very high probability of achieving monetary success, and if you will also give me the benefit of the doubt that it is possible to identify such promising individuals with a fairly high degree of certainty, then I believe that the following idea could be worthwhile to pursue:

POTENTIAL (working name for the firm) would provide a short-term post-graduate salary of dollars over years to carefully selected college students in exchange for nothing but z% of the individual's future after-tax earnings over w number of years.

Setting the few variables to the right levels with reasonable confidence would require additional research and consideration on my part, but for the sake of providing an example, a 22 year-old Vanderbilt graduate could be awarded a $100,000 salary over two years in exchange for 3% of his or her earnings over the next 25 years thereafter. 

If the salary was instead $1 million for 5 years and the return was 1% of earnings over 10 years, I think we can both agree that that would be unprofitable for the organization and hugely and unfairly advantageous for the graduate. On the other hand, if the salary was $20,000 for 1 year and the return was 30% of earnings over 50 years, I think we can both agree that that would be extremely profitable for the organization, but no graduate in his or her right mind would apply. The very fact that there are ways to make the numbers overly favorable for each side, to me, suggests that at certain levels the deal would be both largely profitable for the organization and an extremely attractive opportunity for potential applicants.

The organization would serve as a sort of club that would be quite exclusive to start, but scale appropriately to become larger and more popular over time. It would gain a reputation such that individuals accepted would have a "stamp of approval" similar to that of an out of college banker, consultant, or MBA. It would also provide a network of very successful young people, and that network and its alumni would presumably develop great relationships with VC investors and recruiters and so on. The perks would be numerous but the central idea would be that highly motivated individuals would now be given the financial freedom to spend their time after graduation as they see fit to begin a successful career without having to worry about taking an unreasonable amount of risk to do their own thing. They could use a portion of the given salary to create a start-up. They could spend their time doing research or pursuing a passion for investing. They could do community service or write a book or travel the world or they could just get a job anyway and consider it a nice bonus and an amazing network in exchange for a very marginal percentage of future earnings. The possibilities would be endless and the potential unboundedhence the working name.

My conviction for this idea is solidified by the fact that I would have almost certainly applied for such an opportunity if it was made available to me, and not only would I have wanted the organization to make a profit off of me in the long-run, I would have been absolutely determined to make that the case. 

In closing, thank you very much for taking the time to read this lengthy note and for your consideration of this idea. I trust that you will keep it confidential. I will very much look forward to your feedback. Thanks again.

Best,

Jake

Today, the concept I describe where a person could accept money in exchange for a percentage of their future income has a name. It is called an income share agreement ("ISA"). ISAs have somewhat suddenly gained legitimate attention through their implementation at Lambda School and elsewhere. This morning, I read that Erik Torenberg and On Deck (one of two contenders which I think has the best chance to become the next generation YC, (the other being Pioneer)), is talking about launching a "fellowship for people who want to Self-IPO". It was Erik's article that motivated me to share my old email today. This is an idea that I have thought holds merit for years. I thought it was original when I first came up with it, but it turns out to have a history of failures. Still, I am confident that it is poised to succeed and I am hopeful that I may in some capacity be a part of the first group of people who gets it really right.

I have had a number of ideas around ISAs that trace back to my initial email from nearly 3 years ago. The recipient's response to my email requested that I send him a 5-10 slide business plan. Believe it or not, I got about 90% of the way through that when my gym bag was stolen with my work laptop in it and I lost all of the files not saved to my company drive, including this PowerPoint and the supporting Excel. I was really busy with my job at the time and the realization of losing all of my work on the Potential pitch was so depressing and the thought of redoing it all so daunting that I failed to ever bite the bullet, re-do the work, and follow up with the VC. I think I have retained most of the core ideas within the larger idea but I have still yet to take the time to do the math and put it all to paper again. Maybe some day...

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