Fantex Holdings, a Silicon Valley startup, has put together a unique approach to IPOs: The firm is taking athletes public! Fantex pays an athlete upfront in exchange for a percentage of the person’s career earnings. However, Fantex’s IPO has gotten off to a rocky start.
The first athlete to participate in the deal is Arian Foster, the star running back of the NFL’s Houston Titans. For $10 million, he agree to give up 20% of his overall earnings (with some adjustments).
But as I noted in a recent post for the IPO Playbook, there are certainly some troublesome risk factors. Consider that Foster is only guarnateed $20.7 million of his $43.5 million five-year contract. The remaining is subject to termination at any time because of unsatisfactory performance or if he engages in immoral conduct.
Another issue for the IPO: From the athlete’s perspective, the logic actually defeatist. Why give away 20% of your income for an upfront fee unless you think things might not go too well? And if that’s the case, why would others invest in your future?
But of course, the biggest problem is the threat of injuries. Unfortunately, we got a reminder of this during last Sunday’s game, when Foster had to leave because of a pulled hamstring. He carried the ball a mere four times and gained only 11 yards.
True, hamstring injuries are common occurrences, especially for running backs. In fact, Foster is expected to play on November 3rd (the Titans are currently in a bye week).
But the incident is a big-time reminder that the NFL is an extremely tough sport — and top players can easily go cold. And that’s the kind of thing you really do not want to deal with when it comes to IPOs. After all, it’s hard enough to figure out operating companies, as seen with deals like Zynga (ZNGA) or Violin Memory (VMEM). But trying to project an athlete’s future earnings?
You’re better off in the stock market.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.