start up venture: in 2010 you can buy stock in the draft prospects

by homerandflanders on Jun 24, 2009 10:26 AM PDT Comment 23 comments

I comment on BE fairly regularly. 90% of my ideas ilicit vulgar responses from the majority of the community (my proposal to trade for Baron Davis; my proposal to trade for Lou Williams; my suggestion that Joel Przybilla belongs on the Heat).......I apologize for using BE as a forum to gauge interest in this start-up venture, but I figured that there is no greater concentration of NBA maniacs in the world than on Blazers Edge. So, here it goes.....

I am working with a company called Thrill Capitall (www.thrillcapital.com). We hope to create a "stock exchange" of sorts with NBA contracts. If we were already up and running, this is how it would work:

Realizing that his hype may never be higher, Ricky Rubio comes to us before the draft wanting to lock in some profit right now. So, he signs a contract whereby he auctions off 50% of all his future basketball income in exchange for a fixed payment now. The 50% interest will be divided into hundreds of thousands of shares.

So, if AK1984 is convinced that Ricky Rubio is the next Jason Kidd, and will make over $100 million over the course of his career, then AK1984 will bid per share at a pro-rated price below $50 million. So, for the sake of simplicity, lets say that AK1984 buys all of Ricky Rubio's 50% shares in exchange for $40 million dollars. Then, if Ricky Rubio winds up making $100 million over the course of his career, then AK1984 gets $50 million (50% of $100 million), and makes a profit of $10 million.

But, if Rubio sucks up the joint, and turns out to be no better than Dan Dickau, and only makes $20 million over the course of his career, then AK1984 gets $10 million (50% of $20 million), loses $30 million, since he paid Rubio $40 million. This is a way for Rubio to insure himself.

The fun part will be that as long as AK1984 owns "stock" in Rubio, he will be able to trade his stock on our trading platform (just like the NYSE or Nasdaq). So, lets say that Rubio's first game as a pro he puts up a 31/14/8 line with 5 steals, AK1984 may be able to sell a "share" of Rubio for a lot higher than the prorated $40 million he paid for him.

Essentially, its a way for players to insure themselves by putting the risk on investors (fans), while allowing investors (fans) to profit off of heady investments in good players.

Any questions? Comments? Suggestions? Personal Insults? Please, the more comments the better.

0 recs | Comment 23 comments

Story-email Email Printer Print

Comments

That’s really interesting. So many arm-chair GMs are going to lose sooooo much money

by 50backflips on Jun 24, 2009 10:49 AM PDT reply actions 0 recs

btw I'm buying low on Bayless

by 50backflips on Jun 24, 2009 10:49 AM PDT up reply actions 0 recs

Moral hazard is the biggest problem

in this type of investment.
You´ll also need a lot of access to NBA players and a great team of lawyers to help you.
Las question, is it legal to do what you´re planning to do?

by Falcao on Jun 24, 2009 10:55 AM PDT reply actions 0 recs

explain what you mean by "moral hazard"?

You mean we are encouraging the players to not work hard for the contract since they sell so much up front?

Yes, we will need a lot of access. The key is the agents. But the way we figure it, if the agent gets 3% commission, he will have just as great an incentive as the player to lock in the profits. I am sure that Jay Williams’ agent (Bill Duffy I believe) wishes he could have locked in 3% of Jay Williams’ future income in 2002.

I attend Wake Forest Law School, and working with a handful of professors, to the best of our knowledge, yes this is legal.

Tell me, if it existed, and if you could invest in say John Wall for .01% (not 1%, but .01%) of his future income for $100, would you do it?

thanks for the interest

by homerandflanders on Jun 24, 2009 12:12 PM PDT up reply actions 0 recs

Moral hazard is usually a finance term

usually up there with “imperfect information.” It basically means that people act differently when they know they’re not at risk. As it stands now, Rubio has a ton to lose if he does something stupid and gets thrown in jail. If his risk structure changes because he hedged his bet and just took the early payout (hit the button on Deal or No Deal) his incentives all change.

This has the potential to screw a ton of people over. When all it takes for a huge market to crumble is one guy getting a DUI Manslaughter, the risk gets pretty huge.

by Twith on Jun 24, 2009 3:57 PM PDT up reply actions 0 recs

but again, he is only auctioning off 50% of his income

He still gets to keep the other 50%. So, maybe the moral hazard risk doubles, but, but it wasn’t that high to start with anyway.

by homerandflanders on Jun 24, 2009 4:28 PM PDT up reply actions 0 recs

A mechanism like this...

Is already in place, with the “Fantasy Sports Stock Exchange” although this idea takes it one step further in that you’re using actual dollars to buy actual stock as opposed to investing with a fictional portfolio.

From an investment stand point, the risks of a draft pick seem far greater than that of an S&P regulated stock. Additionally, US and foreign markets are having a hard time drumming up investments in legitimate enterprises right now, so who’s to say that people are more likely to invest their savings in a 19 – 22 year old?

The biggest problem comes with the introduction of new players (a sort of bizarro IPO system) and setting the initial market price with cap ramifications… Here’s an example…

Paul Allen really, really likes this player (we’ll call him Berryd Jayless) but he doesn’t have the long-term cap flexibility to promise him “franchise pg” status. Could he then hook Jayless up with your system to circumvent the cap?

Berryd sells “Bid on the rights to my future earnings” and then Paul Allen uses his leverage (read: $$$) to drive up the market price. Jayless walks away with 50% of his future earnings up front and then never signs a contract with Portland for more than the league minimum (as an extreme example) or something like $2.5 million… Then Roy, Aldridge, Oden and Batum follow suit, so Paul Allen makes a 1-time payment of say $150 million and then has these 5 players under contract for the rest of their careers at the league minimum… The richest owners lock up the best talent long term and don’t hurt their cap space (essentially the end of parity and the standard CBA agreement).

So, now you’re getting into legalese a little bit beyond my understanding, but essentially, you’d have to contact the Players Association and the NBA for the rights to use their players’ likenesses in your “NBA Stock Market”, then you’re going to have to pitch them this idea with the knowledge that it would completely up-end their current CBA agreement and increase the likelihood of Bernie Madoff-esque backdoor deals and financial maneuvering that most likely decreases the quality of their product… And if that wasn’t enough, you then had to pitch investors on players that have an average life-span of 3-4 years, when we (the people likely investing) don’t even have access to the same information that the NBA has (i.e. advanced scouting reports, open access to work-outs, open access to the players themselves, etc.) which prevents due diligence.

So, in conclusion, here’s some simple math…

Say a “max contract” player makes $75 million over 5 years in addition to the rookie contract of say $4 million for 4 years… That’s $91 million dollars over 9 years for a player like Brandon Roy… To make up the difference, Roy would’ve needed $59 million UP FRONT and a return of 5% a year (not too unlikely but still not guaranteed) to make it worth his while. Additionally, if you split that $59 mil up into shares, that’s 100,000 people investing $590 or 1,000,000 people investing $59. I’m going out on a limb as to say you’d struggle to find that much interest because for every Brandon Roy, you have a Michael Olowokandi, Bryant Reeves, or an even more complicated Josh Childress (what if the player decided to persue his career overseas? Would investors be compensated at all?)…

"Now, you take a bobcat or a Jayhawk. You know they'll run if you give 'em the chance. But when one don't run, why, you shoot him and shoot him quick. Raef's my dog, Pa. I've gotta do what's right..." Old Yeller (1957)

by RoyGoesTheDynamite on Jun 24, 2009 11:21 AM PDT reply actions 0 recs

Yah

It’s an interesting idea, but the logistics seem insurmountable

by Illmatic88 on Jun 24, 2009 11:39 AM PDT up reply actions 0 recs

great reponse, this is exactly what I was looking for

1)People invest in far riskier things that 19-22 year olds. Do you think people that buy natural gas futures know anything about the natural gas industry? Besides, I don’t think NBA players are quite as risky an investment as you make them out to be. I mean, even Kwame Brown will wind up making $50 million over his career. And even if they are especially risky, that will be built into the price of their stock.

2) Yes, it would need to be heavily regulated. No one with any financial incentive in any professional organization would be permitted ot bid. It allows for the market to be easily rigged.

3)Yes, I am sure we would need to work with the NBA and the NBAPA, but this can only make the league stronger. It allocates risk to the fans. Fantasy sports would become real.

4)Access. This would create a whole new industry in terms of marketing basketball formulas and scouting topics. One of the requirements of selling yourself would be to fulfill a certain amount of disclosure (just like a public company). For example, we would make Ricky Rubio put up film of himself on the internet playing, running, jumping. An interview with him. Basically, all the information required to make an informed investment.

5)Brandon Roy: perfect example. Although it seems crazy now, at the time, it was not a sure thing that BRoy would be the superstar that he is (I mean, the TWolves traded him for crying out loud). So, yeah, Roy will now make about $91 million, but don’t you think he would’ve gladly taken $60 million total back in 2004, thereby making it only $30 million that he needed up front? Players who get picked in the top 8 are busts all the time. Don’t you think Roy would love to limit his risk of winding up like Dermarr Johnson and sell himself on the open market.

It is all about creating markets. Please, tell me more. If it existed, and the rules were fair, and you have tons and tons of information on all the players in the draft, would you participate?

by homerandflanders on Jun 24, 2009 12:25 PM PDT up reply actions 0 recs

You're talking in circles here...

If the soon-to-be NBA player sells the rights to 50% of his future income, the agent would have to get 3% of the “gross sale amount” (so if B-Roy sells for $50 million, his agent would get $1.5 million). No agent in the world would take 3% of the future income (defined here as a 6% interest in the publically traded portion of the player) because as soon as Roy (or X player you use as an example) gets his money up-front, he no longer has to work to improve his craft.

You’re essentially betting his natural talent and personal drive are enough to make him a good basketball player, because you’re removing the financial incentive to improve.

Additionally, the need for governmental regulation (i.e. FTC) is immediately apparent as you’ve done nothing to mention the impact on the current salary cap and NBA’s Collective Bargaining Agreement. Without even introducing the argument of insider trading (Paul Allen buying all the best players with large payments up-front), you can see the problems because if Roy were to get $50 million up front, then that’s essentially supposed to represent 50% of his future earnings. Would you put “expiration dates” on the shares so that you could quantify their value and count them against the cap (i.e. a 10 year warrant that in sum totals $5 mil over 10 years?) or would this be outside of the cap altogether?

This allocates the risk to the fans, but god forbid you’re a fan of a small market team with less of a population to draw interest from marquee players. If LBJ knew he could drum up enough interest to sign an immediate contract worth $50 million in New York, why would he ever consider signing a contract in say Milwaukee or Oklahoma City? This makes the rich even richer and then magnifies it by 10×.

In terms of “access”, the NBA is legally allowed to prohibit access to the inter-workings of their industry. Who’s to say you’ll be able to gain any sort of access, beyond that of the players who are interested in money up-front?

3 more examples…
1.) Antoine Walker
2.) Darius Miles
3.) Zach Randolph

Tell me that the game of basketball (or the “product” of basketball) would’ve been better if these guys had gotten their money up front… Tell me you’d invest knowing that the NBA draft has something like a 10% success rate in producing players that last over 7 years… The only industry you’d create is a need for additional insurance in case your “investment” happens to require microfracture surgery or (god forbid) gets in a motorcycle accident…

by RoyGoesTheDynamite on Jun 24, 2009 3:00 PM PDT up reply actions 0 recs

once again, thanks for your input. However, i think you misunderstand me

1)Remember, the player is only auctioning off a percentage of his future income. In my hypothetical with Rubio, he was auctioning off 50% (which would be the maximum). So, a rookie getting $50 million would still have an incentive to play hard for the first four years because he still gets 50% of his next contract. If BRoy had sold himself 3 years ago before the draft, and gotten $25 million, he would still have an incentive to play hard, because, or else, that initial contract is all he would get. Likewise the agent would also want him to work hard because the agent again gets 3% of the next contract.

2)No, the salary cap still exists. Everything involving the CBA stays the same. Just think of it like alimony or child support. Regardless of the salary cap or the CBA, a judge is going to require the player to provide for his wife or child. Rubio sells 50% of his income for $30 million. He gets picked #2, and makes an annual salary of $4 million for 4 years. The $4 million counts against the cap. Then, he signs a max extension in four years at $12 million per, and the $12 million counts against the cap, even though Rubio only gets to keep $6 million of it.

3)I don’t understand your argument that bigger markets are at an advantage. Ricky Rubio sells himself to the public at large. It doesn’t matter where the investors are located; they can be New York, Memphis, Portland, etc. It is just a way for Rubio to raise money. The contract with the investors is just a derivative of the contract with the team.

4)Access: statisticians and financial geeks will more than ever have an incentive to develop complex formulas to try and predict who will pan out in the NBA or who they should buy stock in in order to gain an advantage.

I am enjoying this back and forth

by homerandflanders on Jun 24, 2009 3:48 PM PDT up reply actions 0 recs

Who is funding this venture?

Offseason:
PG Options: Mike Conley Jr(T)/Jrue Holiday(D)/Rodrigue Beaubois(D)
SG Options: Mickaël Piétrus(T)/Terrence Williams(D)/Paul Harris(D)
Forward Options: Serge Ibaka(T)/Taj Gibson(D)/Ater Majok(D)
C Options: Alexis Ajinca(T)/Bamba Fall(D)

by TheGreatDane17 on Jun 24, 2009 12:10 PM PDT reply actions 0 recs

a New Zealand-based firm along with some people in New York

and myself. We are looking for help and capital.

We are very new young. Anyone with any ideas, throw them out there. This is great.

Be creative. How could this work?

by homerandflanders on Jun 24, 2009 12:27 PM PDT up reply actions 0 recs

check out protrade.com

this is something somewhat similar, though a little broader in scope than just contracts.
http://www.protrade.com/

one of the original founders, jeffery ma (featured in the movie 21), works or worked with the blazers. i am not sure if he is still involved with either the blazers or protrade.

by 77revisted on Jun 24, 2009 12:44 PM PDT reply actions 0 recs

yes, we know about protrade

Yes, I am pretty sure Jeff Ma still works with protrade. It may be a side venture.

I don’t know, protrade has been around for a few years and has not caught on. I personally do not like it. It is just too similar to fantasy sports.

by homerandflanders on Jun 24, 2009 1:10 PM PDT up reply actions 0 recs

The NBA would never allow it

At least with David Stern they are too controlling they want to be in charge of everything money related. They could write it into the agreement between players and owners.

"Knowledge will get you from A to B. Creativity will get you anywhere." Einstein

by Garden of ODEN on Jun 24, 2009 1:04 PM PDT reply actions 0 recs

the NBA cannot prohibit the contract

The contract would be between the player and the investor (fan). It would be no different than a player buying a new car. Any attempt by the NBA to limit the contract would be grossly illegal.

Besides, the NBA would love all the interst. The more you invest, the more likley you are to watch the games, and bring in mroe revenue, etc. etc.

by homerandflanders on Jun 24, 2009 1:07 PM PDT up reply actions 0 recs

Someone tried this once before

In this case, minor league baseball and player initiated. The website is down now, I’m not sure what ended up happening with that.

http://www.slate.com/id/2182824/pagenum/all/

by marble47 on Jun 24, 2009 3:08 PM PDT reply actions 0 recs

Yes, I know what your talking about

That is Real Sports Investment. Their idea is different. The way they work, Ricky Rubio would incorporated himself, and then you would in essence loan Rubio money, and then hope that he makes it big and is able to pay you off.

Any other questions?

by homerandflanders on Jun 24, 2009 3:50 PM PDT up reply actions 0 recs

The agents lock down players much earlier these days, while they are still in AAU. Years before the draft.

So do the shoe companies if it is a very promising player (Telfair got more money from Adidas than the Blazers, so did LeBron from Nike, Oden probably too, etc.).

Maybe the agents would be interested to spread the risk. Maybe not, and their mechanism of spreading risk is to have as many clients as they can, not as many investors as they can for one promising client. That’s the area I would investigate heavily. Maybe attend agent seminars, go to summer league in Vegas and try to talk up agents how they would see such a venture, talk to AAU executives, etc.

by Norsktroll on Jun 24, 2009 3:39 PM PDT reply actions 0 recs

that is one big question we are trying to figure out

Should endorsements and non-basketball related income be included in the deal? We think not, because it is far too complicated, and will lead to endless litigation. For example, if Channing Frye sold some artwork he made, was it sold because it is art, or sold because it is Channing Frye.

Do you think you would use it if it was up and running?

by homerandflanders on Jun 24, 2009 3:52 PM PDT up reply actions 0 recs

I think you would get investors

People invest in just about everything. Movie funds was a popular high-risk investment vehicle in Europe (especially Germany, since it was tax deductible for supporting the arts) a couple years ago. The fund then acted as a co-producer for all kinds of movies from independent to blockbusters. If the movie flopped, the fund made less money.

The problem I see is rather that the existing constituencies (agents, player association, NBA, etc.) might not like it. Maybe a future CBA in 2011 provides less guaranteed contracts or more money only to superstars. Then it could get more interesting to them.

by Norsktroll on Jun 25, 2009 9:18 AM PDT up reply actions 0 recs

thanks a lot norsktroll

Agents: they are definitely the key, but the way I figure it, if an agent gets a 3% cut (or whatever commission it is) he has just as much incentive as the player in getting paid early since he runs the same risk. EX: If Im Thabeets agent, knowing that there is a very good chance that his client may never sign a another contract for more than the MLE, he would probably take the sure thing and take a commission off of the public offering, where he could raise a lot more money. But yes, agents are definitely going to be hard to convince.

PLayer Association: again, i think the NBAPA will like this because it will mean more security for the players at the hands of the investors, and will get more dues into the NBAPA coffers.

NBA: after studying the CBA and talking to various lawyers, we are convinced that the NBA has no power to prohibit the players to agreeing to this deal. It is just an outside business deal of which the NBA cannot infringe on due to rules against improper restraint of trade.

The 2011 CBA is a huge obstacle though. I know the post says 2010 draft, but obviously, we are no where near ready for that. We cannot do anything until after the next CBA. But I just wanted to hear some opinions.

That is a great analogy about the German movie funds. It is a similar concept. But where I personally think Thrill Capital will be fantastic at is in trading the contracts on a secondary market. So, after Rudy Fernandez score 40 points in a game, his contract will be trading at a higher price than the night before, etc.

Again, thanks a lot norsktroll

by homerandflanders on Jun 28, 2009 9:37 PM PDT up reply actions 0 recs