Education Risk

Arian Foster Decides To Short Himself

There’s an interesting article on The Atlantic’s website about football star Arian Foster’s selling off a portion of his future income to a startup company called Fantex.

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As The Atlantic notes:

Arian Foster, the star running back for the Houston Texans, is now the first athlete to go public. He has sold a 20 percent stake in his future income to Fantex Holdings, a stock market for buying and selling shares in the earnings potential of athletes. 

It works like this. Arian Foster gets a check for $10 million. In exchange, Fantex gets a 20 percent “tax” on all future Arian Foster income. That means if Foster earns more than $50 million starting now, Fantex and its investors stand to make money. If Foster earns less than $50 million, he just signed a sweet deal.

Actually, forget if. Foster just signed a sweet deal. With just over $20 million left on his current contract ending in 2016, Foster will be 30 when he’s up for another contract. For work-horse backs like Foster who carry the ball 300-400 times a season, 30 years old might as well be 90. He will never get another $20 million contract, which means anybody betting in his future is hoping Foster gets on ESPN and slowly works his way toward $50 million over the course of the next few decades.

Of course, finance and risk pros recognize this type of deal as a securitization, which is a deal wherein Party A sells off some future income to Party B in return for a discounted up-front cash payment. This kind of deal is common in certain industries but is rare in sports. Similar deals have occurred with other famous people, and, as the article notes, this is probably a great hedge for Foster, who takes massive earnings exposure every time he steps onto a football field.

Still, one wonders why this type of deal is not more common in other areas of life. Assuming the risk could be priced appropriately, selling off a portion of future earnings for, say, the money to pay for a first-rate education might be a worthwhile trade for many. This is unlikely to happen any time soon, of course, but the Foster experiment is one to watch.

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