Vernon Davis IPO is coming

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If you’d like to buy stock in an NFL player but you realize that Texans running back Arian Foster is getting much closer to the end of his career than the beginning and may have taken $10 million in exchange for 20 percent of his future earnings as some sort of an exit strategy, how about buying stock in an even older player?

Darren Rovell of reports that 49ers tight end Vernon Davis has become the second NFL player to sell a chunk of his future earnings to Fantex in exchange for cash now.

Davis will get $4 million up front in exchange for 10 percent of his future earnings — as long as Fantex can find enough suckers people to finance the $4 million investment, with Fantex making its money from the buying and selling of Vernon Davis shares.

As one NFL insider opined to PFT, Foster would be a bad investment.  He’s 27, he’s wearing down, and he could be cut after the 2013 season.  Davis isn’t much better; he’ll be 30 in January, which means he has had plenty of wear and tear.

It makes more sense to invest in a young, ascending player, but some league insiders believe that few young athletes with real promise would agree to a transaction that essentially amounts to betting against themselves.

“That’s not in the nature of pro athletes,” one agent who requested anonymity observed.  “I certainly would not advise it.  This concept was brought to one of our guys and both [the agents] and his financial advisors did not think it was beneficial for him.”

So why would Foster and Davis essentially bet against themselves?  Either they really need the money in the short term, or they’re starting to realize that they’ll soon be out of the game.

Regardless, they’ll carry around for the rest of their lives the obligation to surrender a piece of their football-related earnings.  That could result in all sorts of strange outcomes, including but not limited to cash-only autograph signings that, if/when the poop hits the propeller via a shareholder lawsuit, could get the player prosecuted for tax evasion.

As a different agent told us in the wake of the news that Foster was giving up 20 percent of his future income for $10 million, any transaction of this nature would be preceded by a 20-page, single-spaced letter from the agent explaining every conceivable risk.  In the end, the agent said the recommendation would always be to not take the money.

I agree with that assessment, and I’d also recommend against buying stock in any pro athletes.

Then again, my investment strategy consists of burying cash in jars in my backyard.

Great, now I have to go dig them up and move them.

23 responses to “Vernon Davis IPO is coming

  1. Hey, your strategy is better than mine. I follow the Buy high, sell low contrarian strategy. Works every time.

  2. This is the best thing since slice bread for the players….they should have players lined up around the corner for this.If foster can get 10 million at age 27 with wear and tear on the body and a injury away from ever playing again……sh5t he better run and get that.look at it this way if foster is making 10 million per year he would have to play 4 more years at that salary for him to make that 10 million that they gave him and I promise you sure as the sun rose this morning he will not be making 10mil a year in 2 years.

  3. Yeah, let me know when I can buy stock in Andrew Wiggins.. who was already offered a 10 year 180 million dollar deal with Adidas “if” he goes pro after his 1st year at Kansas.. the dude hasn’t even played in a game yet and he’s worth more money than Davis and Foster? What a joke, but hey, it’s the stock market, and my money is going where the money is at!

  4. These are obviously lousy investment opportunities for investors and great payment opportunities for the NFL players (if the stock offerings actually are completed, which I assume is highly unlikely). The pricing wildly overvalues the players’ likely future football-related earnings.

    It is very simple. Foster is selling a 20% interest in his football-related earnings for $10 million, and Davis is selling a 10% interest in his football-related earnings for $4 million. That means that the proposed stock deals are based on the present value of Foster’s lifetime football-related earnings being $50 million, and the present value of Davis’s lifetime football-related earnings being $40 million. The present value of $100 in 2020 or some future year is worth a lot less than $100 today.

    Do any sensible people think that Foster is going to earn another $50 million in his lifetime from football-related contracts (playing, coaching, announcing, endorsements, etc.)? Does anyone think Davis is going to earn another $40 million? In fact, for the deal to make sense for investors, Foster needs to earn a lot more than $50 million and Davis needs to earn a lot more than $40 million because the value of $1 to be received in the future is less than $1 today. Time value of money. $100 today is worth a lot more than $100 in 2025.

    Unless Foster is going to earn $5 million or more and Davis is going to earn $4 million or more per year every year for the rest of their lives from football-related activities, the stocks will be lousy investments but the deals will be great for Foster and Davis.

  5. I’m not really an achiever in maths, but these deals seem like a no brainer for these particular athletes ( at least on the surface).

    Correct me if I’m wrong (as I often am), but the only way the players “lose” out is if VD makes more than $40 million for the rest of his life (10% of which would exceed the $4 million advance) and if AF makes more than $100 million for the rest of his life (20% of which would exceed the $10 million advance).

    I’d say anyone who is not one of the 10 most elite players in the NFL (or most marketable) and is in the second contract of their career should sign up for this.

    That said, I can’t imagine this will ever get off the ground. Are there really enough fans to buy that amount of stock in NFL players?

  6. If I’m buying stock in an athlete it’s not going to be an NFL player. It’s going to be an NBA player and an elite NBA player at that. LeBron, Rose, Durant. Those are the guys you know you’ll get a good ROI on. Name me one NFL player other than Peyton Manning that you’re sure to get any return on your investment. No one in their right mind will invest in an NFL player. It’s just far too risky. But there probably will be a bunch of suckers with money to burn that will feel like investing in Foster and Davis is a dream come true.

  7. ronrivers:

    You don’t have to be a fan to buy the “stock”. There will be a lot of people who will play the game in effort to try and create a margin for themselves at the expense of others who don’t play the game as well as them. Just because it might seem like a major scam for more than one reason to some people doesn’t mean that a knowledgeable person can’t outplay other “investors” and make money off of it.

    If this “investment” was presented in the Shark Tank, then basically this is one of those deals where a guy like Mark Cuban would say I don’t want to be in this business whether it makes money or not, but a guy like Kevin O’Leary will say gosh I can’t believe I didn’t think of this wonderful idea myself.

    I’m tempted to play the game myself just for entertainment and curiosity’s sake, plus I bet I could be pretty good at it and make some money potentially, but I’m definitely not going to. Those 3 temptations aren’t enough to get me to have any part of it. No way and no thank you.

  8. I dont know about Foster but Davis seems pretty savvy. He’s bought at least one franchise as well as an art gallery I believe. I won’t fund it but hopefully He will at least be one of those that doesn’t go broke a year after retirement.

  9. Anyone want to invest in me? $1,000,000 for 100% of my earnings going forward. I’ll be sure to text my boss all work that I need to get done while I’m on a beach in the south pacific. You have my word.

  10. My advice to any “investor” who partakes in this type of scheme would be as follows:” I told you not to be stoopid, you moron”

  11. Anyone who thinks that Davis is going to make 40 mil or more in the remainder of his career is dreaming. These are suckers bets. Stay away, stay far far away unless you simply want bragging rights for “owning” a tiny piece of a given player. Be prepared to lose every dime or almost every dime you put in otherwise you’ll be sadly disappointed.

  12. Thinking a little more about this I think it’s also an indication that any players involved have already blown through all the millions they’ve already made.

    Now they’ll get another chunk of money they’ll blow through before they’re even done playing. The guys who put themselves on the block like this are the ones too stupid to manage their money properly and will end up broke and desperate a couple years after they’re done playing.

  13. I’m not exactly clear on how this all works…

    But, it seems to me that there is potential for a company to game this system. A company like Adidas buy up stock in Foster and then give him a sponsorship deal that affects the stock in a positive manner.

  14. First of all, don’t take investment advice from a former attorney turned sports blog writer.

    Second, as a financial professional, I’d say this works out in everyone’s favor. The athlete gets future money now. Always take the lump sum…ALWAYS. $1 today is worth more than $1 3 years from now because of the time value of money. So VD gets $4M now and starts investing, and getting it working for him. If the money grows at a rate higher than about 7% he definitely wins.

    At 10% of future earnings, the investors are hoping that he earns more than $40M over the next 4-8 years (depending on how long he plays). His base salary is in the $5-7M/yr range and his last signing bonus was $10M. His next contract will be in 2016, and I’d expect his current salary level to continue with a similar signing bonus, but perhaps for fewer years. So if he plays 5 more years, the investors will at least recover their investment. Any more, and they’re making money.

    Everyone wins.

    David Bowie did something like this in the 70’s. It’s a textbook case in bond valuation used in every finance class I ever had.

  15. Case Keenum types, making league minimum and stuck there for two or three more years before out of rookie deal might benefit and be a stock worth investing in. I don’t think the teams can pay rookies more even if they wanted to.

    I don’t believe these deals include 10% of the salaries, just “football related” endorsements and the like. I wonder why it does not include actual salaries? The up front payment would be much more.

  16. So what is going to happen at NFL HQ when an owner like good ol’ Jerrah goes to an UFA and says, “we can’t get you in under the salary cap, but I have a pal who is going to buy all of your stock for a total of $20 mil up front, to make up for the minimum contract you are going to sign here and you don’t need to bother to pay him back.” No way this scam is going to fly with Roger G.

  17. Everyone is missing the #1 benefit to the player selling himself….he converts his future salaries that would be taxed at ordinary income (close to 50% effective tax) to capital gains (taxed around 25%).

    For VD, $4 million in income would net approx $2 million as salary….but will net around $3 million if it’s treated as a capital gain.

    This is a no-brainer for the athlete that can get it done.

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