Shared income and bespoke finance

Shared income and bespoke finance

This is the 4th essay in a 5-part series on funding models for the creator economy

  1. Funding the creator economy
  2. Avoiding the venture trap
  3. Cash rules everything around me
  4. Shared income and bespoke finance
  5. NFTs, $GME, and the crowdfunded Cambrian explosion

In between debt and equity lies an idea that is quietly changing education. It's called an income sharing agreement or, for less of a mouthful, an ISA.

Ironically, incoming sharing agreements spent their first 50-years of existence as an obscure academic idea. Milton Friedman briefly explored the idea in the 1950s, and Yale explored it in the 70s, but it wasn't until the 2000s that people started seriously making ISAs to fund education.

Income sharing means that you agree to pay someone a percentage of your future earnings for some period of time. You only have to pay back the ISA if you make enough money, so there's low downside risk for the borrower and highly aligned incentives for the loaner.

Universities now frequently offer ISAs as an alternative to traditional student debt. But software bootcamps and other trade schools are even better use-cases, because the good ones can consistently help you make a high salary after graduation. Lambda School popularized the model. Lambda trains people as software engineers and has been so successful with it that their founder does things like this:

But this model is based on their ability to consistently land you a job at an existing company. While it's a great gateway to financial freedom, it doesn't solve for independent online creators, who face less certain outcomes.

Creator ISAs

The opportunity is much bigger than education. I think income sharing could help accelerate the creator economy. Investors can take a bet on up-and-coming creators and share in their upside. Creators can get started knowing that they will either succeed or walk away debt-free.

It's a model that has already proven successful in other industries with independent workers—like baseball! Many minor league players have potential to make it to the majors, where salaries go up dramatically.

Minor league average: $10,000. Major league average: $540,000.

So, some of them make a deal with Big League Advance. They get cash up front while in the minors, and if they make it big they share a percentage of their income. In industries with a wide range of financial outcomes, this can be a win-win deal for people early in their careers with high potential.  

The creator economy is built on personal monopolies, so it will operate on a power law distribution. Whether you look at YouTube subscribers, Twitter followers, or the top earners on OnlyFans, it is going to look something like this:

Income sharing agreements can help new creators earn a living while they are trying to break out from the pack. If they do, they happily share the upside with the investor who believed in them early. And if they don't succeed, they can walk away without any debt.

I am such a believer in the ISA model that I started the Creator Fellowship to fund independent online creators. Here's how it works:

  1. We invest $20,000 in you over the course of a year.
  2. You quit your job & create full-time.
  3. We provide support, mentorship, and a community.
  4. In exchange for our investment, you share 20% of your net earnings above $20,000 for 5 years, capped at 3x the initial investment.
  5. If you want to start a company and raise money from outside investors, we will help you do it & re-invest the ISA into your business.

Early results are promising. David Vargas quit his job six months ago and joined the fellowship to build open-source software on top of Roam. He had never made money independently online, and he's already generating so much revenue that he's on the cusp of his first re-payment. I think there will be millions more people who follow his footsteps.

Shared Earnings Agreements

You can think of a Shared Earnings Agreement (sometimes called a SEAL) sort of like an ISA for businesses. Earnest Capital pioneered the SEAL, which is an alternative to the SAFE commonly used in early-stage VC fundraising [full disclosure: I am an LP in Earnest's fund because I believe in their model].

Earnest makes an upfront investment, and then the company pays back a portion of "founder earnings" over time, up to a multiple of the original investment. Much like the Creator Fellowship, Earnest also has the ability to reinvest their income share into equity if the company chooses to do an equity round. The intent is to create strong founder/investor alignment, allow founders to maintain full company control, and still provide strong potential upside to investors.

This model works particularly well for the indie economy:

  • B2B SaaS targeting niches or specific industries
  • Developer tools
  • Remote tools for remote teams
  • The “picks & shovels” of online entrepreneurship (software that enables building online businesses)
  • Online education and personal development communities, membership models, platforms

The Shared Earnings Agreement is a bit complicated, as any new finance innovation typically starts. But I hope that financial innovations that help people get capital now and walk away debt-free if it doesn't work out will become more common in the future. They could be an incredibly effective tool for leveling the playing field in the creator economy and giving more people a chance to take the leap.

Complex bespoke finance

Shared income or earnings is complicated because it doesn't fit very cleanly into existing buckets. Financing, in the broadest categories, is generally classified as either debt or equity:

Debt financing involves borrowing a fixed sum from a lender, which is then paid back with interest.
Equity financing is the sale of a percentage of the business to an investor, in exchange for capital.

But the reality is more of a spectrum:

Complex bespoke finance is where innovation usually happens. But it's also been known to contribute to global financial meltdowns, so best to proceed with caution. Assuming we aren't trading creator default swaps, it's worth looking for other ways that finance can help creators that haven't been explored yet.

After all, financings are just contracts and software is reducing the friction of contracts. There could be interesting opportunities to offer ISA-like structures with smart contracts and DeFi tools. People are already selling futures of their time in Human IPOs. So far, we've talked about innovative models within the context of existing financial structures and legal contracts. In the last essay, we'll explore where things start to get really weird—financial innovation in permissionless open markets:

NFTs, $GME, and the crowdfunded Cambrian explosion
This is the 5th essay in a 5-part series on funding models for the creatoreconomy 1. Funding the creator economy 2. Avoiding the venture trap 3. Cash rules everything around me 4. Shared income and bespoke finance 5. NFTs, $GME, and the crowdfunded Cambrian explosion -----------------------…