Hating On Personal Equity

The New Yorker has new article called “Is Selling Yourself The Wave of the Future?”, purportedly on entrepreneurs Daniil and David Liberman efforts to finance their careers via equity (i.e., shares of future income) instead of debt or self-funding, and to entice others to do likewise. But like most New Yorker articles, most of its 8300 words are a profile with many personal details, with hardly any of the article actual discussing this idea.

But as I’ve often written on this concept, a concept close to others I’m fond of, let me take this chance to revisit the topic. In this article, I find five complaints voiced about financing careers vis equity:

Their model isn’t so much digging young people out of their predicament as replacing one kind of weight with another. The vulnerable are still vulnerable, and it remains a long way from the bottom to the top.

Yes, equity doesn’t eliminate poverty. But equity might still improve on debt or no funding, approaches that many vulnerable now use.

“Yes, if you’re the kind of person who wants to work at a job you love and it’s predictable how much money you’re going to make, it’s a bad instrument,” Sam Lessin, the venture capitalist, told me. “It works only when someone can squint and say, O.K., you’ll probably fail, but if you work we’re going to make a ton of money.

If the price of such instruments are set by market forces, I don’t see how they would be bad investments on average. Yes there are transaction costs to create equity, perhaps adverse selection in who sells them, and selling your equity can cut your incentive to work. But on the other side are two key gains. First, equity might fund good career investments that would not otherwise happen. And second, equity can help to align the incentives of advisors and promoters, as we already do now with most career agents.

(Note that in my favorite equity variation, wherein the government auctions off the rights to receive fractions of the stream of tax revenue that it would otherwise get from a taxpayer, there is no added disincentive to work, and in fact an improved incentive to work when that taxpayer wins auctions to buy their own revenue streams.)

Investors give money to promising youths—usually through middleman companies such as Upstart—in exchange for a percentage of their future incomes. The traditional knock against such schemes has been that they’re exploitative or worse, a form of indentured servitude.

This seem empty mud-raking slander. What exactly makes equity exploitive or bad? I think the following two complaints get to the heart of what most people really object to, as I’ve also heard them often when I’ve discussed related proposals:

If the young have to present themselves in a particular way to the older generations so that they will find their life trajectory appealing, I could totally see how there could be a social hierarchy you typically just have between benefactors and those who receive those funds. …

One economist told me he doubts that normal people, even with technical protections, could be free of shareholder influence. (“There is reason to expect that a system that starts out that way will evolve under pressure from investors,” he said. “We saw this with changes in bankruptcy law in 2005 that gave the holders of credit-card debt more power vis-à-vis credit-card debtors by making it harder to file for bankruptcy under Chapter 7.”) As most C.E.O.s know, not even success brings freedom from shareholder pressure.

That is, the key complaint is that whomever buys your equity might try to lobby you or your associates to influence your behavior. Or they might try to lobby the government for favorable treatment and powers. That is, they might ask you to agree to changes as a condition of their investment. Or as investors they might try to cosy up to your associates to get them to lobby you toward behavior they prefer.

Note that your associates, in addition to wanting to promote and help you, also have various ways that they want your behavior to change. And they already coordinate with each other to lobby you about these. Such associates include family, friends, lovers, employers, landlords, shared-club members, and business partners. Note further that we already allow you to borrow money, by which once strangers acquire a financial interest in both promoting and lobbying you re your future income.

Once we see that your debt owners, employers, and many other associates already want to promote and lobby you and the government re your behavior, I find it very hard to see how letting you sell shares in your future income adds much to this problem. Especially if we let you decide who if anyone can buy such shares. This seems to me more like a simple anti-capitalist instinct that just isn’t very sensitive to the specifics of this situation.

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