You can now own a piece of Padres third baseman Yangervis Solarte. Or rather, you can own a piece of Yangervis Solarte’s future earning power. For the rest of his life.
Solarte signed a contract this week with Fantex, Inc., a company that Forbes Magazine refers to as the “athlete stock exchange“. Solarte traded 11% of his future earnings for a $3.15 million payday.
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Fantex announced that Solarte was one of five baseball players who signed contracts with the athlete-as-tradeable-stock company. And now, Fantex will sell shares of Solarte to investors who want to buy a piece of the player’s future.
Is this a crazy world we live in, or what?
You may have heard of Fantex last year when they signed their first athlete, San Francisco 49ers tight end Vernon Davis. At this point, the company is fairly small, with a stable of 20 athletes, most of whom are football players. But the company seems to have a fair amount of financial backing, not to mention a Board of Directors that includes luminaries John Elway and Jack Nicklaus.
Solarte and four other MLB players signed contracts this week. This was particularly notable, as these were the first baseball players to sign on with Fantex. The others are Baltimore Orioles second baseman Jonathan Schoop, Philadelphia Phillies third baseman Maikel Franco, Houston Astros pitcher Collin McHugh, and Minnesota Twins pitcher Tyler Duffey. Schoop got the biggest up-front payment, at $4.91 million, for 10 percent of the earnings of his “brand”.
Basically, the players who sign with Fantex are trading a portion of their future earnings, both from salary and endorsements, for guaranteed money now. Why would a player do this? Isn’t it basically betting against yourself? By Solarte taking 3.15 million now, isn’t he basically gambling that he won’t earn 30 million over the remainder of his career?
Well, yes and no. On a strict dollar-for-dollar basis, yes, Solarte is potentially taking less money now than he might have made over the course of his career without signing with Fantex. If he sticks around the majors for another ten years, he might sign contracts in excess of $28.4 million, which is his break-even point. But a few things make this an attractive deal, not just for Solarte, but for many players who might sign on with the company.
First, this is guaranteed money. Well, almost guaranteed. The way the business works, Fantex will hold an IPO, or initial public offering, selling shares of Solarte for $10 a share. If there is not enough demand for a player to cover the amount that Fantex offered, then the contract is voided. But assuming enough people want to buy shares, Solarte makes that 3-million-plus right now, while he is earning $516,400 this year. And while earning half a million bucks a year is a huge one-year salary for normal folks, it’s not life-changing money.
But 3 million is enough to allow Yangervis to decide how he wants to spend the rest of his life, even if he never plays another day of baseball. For Solarte, and other players who have not yet reached that threshold with their baseball earnings, the guaranteed fortune now may well have more psychological value than an 11% difference on his earnings once he gets into free agency, even if that difference ends up far exceeding 3.15 million. Let’s say Solarte explodes in production over the next few years, and ends up signing a five-year, $60 million deal. While he would end up paying $6.6 million of that to Fantex, who would then distribute it to Solarte’s investors, he’d still be taking home 10.68 million a year. And the difference between making 10.68 million and 12 million a year for five years, well, honestly, I can’t say from experience, but I’m guessing that won’t seem like nearly as big a difference as getting a 3 million dollar lump sum right now.
But is it worth it for investors? Would you buy a share of the Padres’ third baseman for $10, knowing that you’d get a little back every year, based on what he was making? (Actually, I can’t find information on how Fantex pays its investors, other than them saying these are basically dividend stocks. If you have more information, please let us know in the comments.)
I think that’s part of the genius of Fantex’s business model. The investment doesn’t have to be quite as sound financially as some other investments, because a significant percentage of investments will likely be made by sports fans just for the novelty of owning a piece of an athlete, or a member of their favorite team.
Another benefit to investors: if you decide to buy a few shares of Solarte, you don’t only earn based on his baseball salary. Off-the-field earnings are also included. So if Yangervis starts doing an ad for Corky’s Pest Control, you get a piece of that action, too. And as these Fantex contracts presumably cover all future earnings, if he buys a car dealership at some point, you’ll be getting a piece of those earnings, too. So, except for the Jack Clarks of the world, who manage to go bankrupt after lucrative sports careers, many players might end up being reasonable investments.
Mlbtraderumors.com suggests that these contracts might affect a team’s ability to sign young players who haven’t reached free agency yet. They make the argument that, since the players have already received their first fortune through a Fantex contract, they may be less likely to sign team-friendly contract extensions early in their career. But for now, at least, the league and the MLBPA seem to be on board.
Don’t expect to see Mike Trout or Bryce Harper on the stock ticker, though, or anyone who’s already signed their first big contract. Once you’ve got that first few million in the bank, the prospect of trading potential future earnings is a lot less attractive.