Posts by Ashni Mohnot
How many times have you heard the words ‘investing in people’ as a nonprofit slogan or a corporate tagline or touted as an international development policy? That phrase has been recycled into many different avatars in as many contexts. But what if you took this phrase literally? What if you could actually invest directly in people, the way you would in a company, and receive dividends per an equity stake in their future income?
Hold your horses – this isn’t as crazy as you think. Investor, visionary, and fan of PopTech Rafe Furst, just invested in “Marge,” someone he believes is a superstar in the making, for a lifetime share in her income. Furst wrote an incendiary blog post about his decision, spawning a litany of polarized opinions ranging from praise (“brilliant”) to aversion (“this is a form of slavery”) to personal attacks (“you’re an a@# with more money than sense”). Change.org’s Social Entrepreneurship blogger Nathaniel Whittemore picked up the story and began a discussion with a number of social entrepreneurs and investors.
Three distinct models of people-to-people investments emerged in the ensuing discussion:
I. Furst found a single superstar he trusted who he thought was worthy of investment and added a lifetime equity stake to a deal built on a personal relationship of mutual trust. The Personal Investment Contract (PIC) Furst placed in the public domain is just three pages long because it stems from that trust. Furst’s deal is replicable by other investors but not scalable because of its personal nature.
II. SE Fund: Equity investment can be a funding apparatus for select superstar social entrepreneurs through a nonprofit trust issuing shares in their aggregated future income. Four entrepreneurs in the discussion put their lives on the line, eager for this type of investment. Interestingly, they all plan to re-invest the funds in their own organizations, whereas Furst’s original intent was for such funds to ease the investee’s life and not replace investments in their startups. He sees the two types of investments as complementary.
III. Enzi: People investments can be scaled in the context of education. Whittemore included me in the discussion because I founded Enzi, a social venture that lets people invest in students’ education in return for a share in their future income for a set period of time. Enzi is currently conducting a pilot at Stanford and securing investments in its first class of Masters EE students.
The following issues arose for discussion across these three models of people investments:
I. Legality – Can investments in people for an equity stake in future income be considered legal? Yes, certainly. Furst and Enzi had legal counsel write the people investment contracts in use. SE Fund advocates will consult a law firm in the new year to sort out possible tax issues that might arise with their model. Depending on the number and types of investors involved, any people investment model might have to investigate securities law.
II. Buyout clause – While it’s psychologically important to have a buyout clause from a future income contract, it can serve different purposes, depending on the model. Furst’s contract has a buyout clause that he considers a red herring – if it isn’t triggered, it’s a bad deal for somebody. A potential SE Fund investor was hesitant about including a buyout clause because it might incentivize the investee to leave the social mission-focused world for a high-paying job to afford buyout. Since Enzi’s investments are specifically for education and don’t involve lifetime income, its buyout clause is more akin to an early loan payoff for students who experience financial windfall such as cashing out on the soaring star of a startup company.
III. Investor preferences – Most people agreed that social return, not just financial, is an enormously motivating factor in all these people investment models. According to Furst, depending on whether the investee was ‘for-profit’ (ex. businessman), ‘non-profit’ (ex. researcher), or in-between (ex. social entrepreneur), he would rely on the percentage of income, the buyout, or a blend of both for his return.
A potential SE Fund investor was willing to take a discount on financial return for the entrepreneur to remain focused on social mission. If his investee jumped ship for the security of McKinsey, he would consider his investment a failure. Another investor considered it a worthwhile deal only if she could add value to the investee beyond money, in the form of a network or connections.
Enzi will entertain the preferences (ex. major, school, national origin) of investors who can invest in a fund of students with those criteria. We believe we’ll attract investors who altruistically re-invest their returns in other students as well as those who are drawn to sound financial returns.
IV. Investee preferences – Furst didn’t disclose much about his investee “Marge” except to say that he shared a close mentor relationship with her.
The entrepreneurs considering the SE Fund deal have personal preferences regarding their investors. One entrepreneur cautioned – ‘you become who invests in you.’ He would take the deal if only for the privilege of having someone he trusted and respected literally invested in his future. Some were inclined to have several investors as a board of trusted directors for their lives while some hated the idea of pitching to a forum of angels because one dissenting investor can influence the judgment of others.
Enzi aims to unlock latent potential in students. Its income-aligned education funding keeps students from fixed-amount crippling debt, enabling them to pursue their passions. In addition, students are paired with investor mentors who help support their professional growth.
The major differences between the three models lie in motivation, desired outcomes, and scalability. Furst has already determined that “Marge” is a winner and is motivated to add value, both personal and financial, to her hard work. His desired outcome is the value they will collectively generate over her lifetime. He pointed out that his model is inherently non-scalable because everyone has different ideals for a superstar candidate they would link with for life. The motivation of the SE Fund is to use people investments as a solution for the funding problems social entrepreneurs face, and the expected outcome is the social impact on the world that these entrepreneurs will generate on account of the investment. The SE Fund can be scalable if its advocates are able to agree on the right mix of investors and entrepreneurs. Enzi is motivated to create a paradigm shift in education finance by providing equity investments in education as an alternative to student loans. Its desired outcomes are removing the financial barrier to education and facilitating increased lifetime earnings and improved quality of life for students. Enzi’s model is scalable: it offers time-limited contracts explicitly for the purpose of education and lets several accredited and non-accredited (‘retail’) investors collectively invest in funds of talented students.
It’s exciting to witness the evolution of these people investment models. Though they target different stakeholders, they can and should coexist – they have potential to be powerful forces of social change. Here’s one vote for people investments as a panel topic at SoCap10! Do I hear another?
Ashni can be contacted via email (ashni [at] enzifutures [dot] org) or Twitter (@ashnimohnot).