Upstart Will Get No Money From Outliers

James Suriowiecki at The New Yorker has a nice piece on Upstart, which allows people to make investments into…people.

In exchange, they pay some of what they earn over the next five or ten years—what percentage you have to pay is determined by how much you want to raise and by the Upstart algorithm’s assessment of your earnings potential. For thirty thousand dollars today, you might end up paying out, say, two per cent of your income for the next five years.

However, Elliot Hannon (subbing in for Matt Yglesias) poses a question about the anomalies:

Where it seems Upstart will make its money, however, will be on the statistical anomalies—the Facebooks, Twitters, you name it. These innovations came about at light speed, from off the charts. It doesn’t seem fair for a future Mark Zuckerberg to have to pay 5% of his annual salary to Upstart, just because it loaned him some money to go to college. That feels creepier than just taking out a loan. Companies like Upstart could well fund the masses, but make its big money hitching on to some sort of genius or innovation that it had very little impact on—it was just that the smartest guy in the room was broke at the time.

This is absolutely 100% wrong and I really hope it’s not Upstart’s plan.  If you’re a tremendously successful startup founder, Upstart is going to get precisely diddly-squat from you.

The key is that Upstart gets its cut from your income, not your wealth.  If you found a startup, you’re the one making choices about your compensation and there are tons of ways you can screw with it.  Foremost on founders’ minds will be figuring out ways to creatively delay their compensation so the greedy moneyman from Upstart can’t get their hands on it.  For example, taking almost all your salary in options.  Upstart’s levy is like a time-bounded income-tax, which should suggest all the ways to avoid it.  Upstart’s money won’t come on the outliers, it’ll come about precisely through the non-outlying normal predictable earners.

Unless they become tremendously successful laborers (e.g., artists, athletes, bankers).  Even then there are good and exciting ways to keep that gross income from becoming net.  It’s only the run-of-the-mill successful people who won’t have the ability to manipulate their income so precisely.

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