Baxnet Ideas · Founder note
If Capital Cannot Lose, It Is Not Investing in You
TL;DR: If backing human potential gives capital a share of every success but sends the full bill to the individual when an attempt fails, the risk has never really left the person.
Investing in People — Part Four. This article follows Everyone Is Investable. Nobody Should Be Ownable., which sets out the wider opportunity and the boundary between investment and ownership. Part two asks how unconventional ability could become credible. Part three asks what the money should actually buy.
Six months after buying back her Tuesday afternoon, the customer-support manager from the previous two articles is still a customer-support manager.
She finished the portfolio projects. One was good and one was less convincing. She applied for different roles, reached a couple of interviews and discovered that parts of data work were less enjoyable than they had appeared at 9:43 in the evening. Then her employer reorganised and the internal opportunity she had expected disappeared.
Nothing went badly enough to make this a cautionary tale. She was given a fair chance to test a plausible next step. The expected financial return simply did not arrive.
Now we have to decide what happens to the money.
If she must repay all of it, with interest, on the same schedule whatever happened, the uncertainty was never carried by the financier. It was carried by her. Calling the arrangement an investment would not change the contract underneath it.
Failure has to belong somewhere
Investment involves the possibility of loss. Investor.gov describes risk tolerance as the willingness to lose some or all of an original investment in exchange for the possibility of a greater return. That is ordinary investment language, but it becomes strangely controversial once the asset being discussed is somebody’s potential.
The distinction is visible in the Congressional Research Service’s analysis of income-share agreements. It describes them as equity-like partly because repayment depends on the outcome and the investor bears most of the downside risk in return for access to possible upside. Conventional debt generally requires full repayment regardless of income. The allocation of risk is one of the main differences between the two.
That does not make an income-share agreement the right answer for every person, or even the preferred answer. A normal loan can be useful when the borrower understands the obligation and has a reliable way to repay it. Grants, employer support, public funding and capped outcome-dependent arrangements can all make sense in different situations.
The problem begins when a provider promises risk capital while quietly writing a contract that gives it every route back to safety.
Imagine an arrangement that takes a percentage when earnings rise but converts the unpaid amount into a fixed debt when they do not. The provider participates in success, while disappointment becomes the individual’s private bill. The language of shared upside has disguised a one-way transfer of risk.
A training bill can become a lock
We already have a less glamorous version of this problem.
Some employers pay for training but require the worker to repay its stated cost if they leave before a particular date. These provisions are often called training repayment agreement provisions, or TRAPs. The acronym is almost suspiciously convenient.
After a formal inquiry, the US Consumer Financial Protection Bureau reported that employer-driven debts could leave workers facing large payments when they changed jobs. Respondents described unclear terms, questionable valuations of training and agreements that could impede movement towards higher wages. The CFPB noted that these arrangements may have effects similar to non-compete clauses. Its report is careful about the evidence and direct about the risk.
Not every agreement to repay expensive training is abusive. The important point is structural. An employer can describe the programme as an investment in the worker while arranging the downside so that the worker pays whenever the investment stops benefiting the employer.
Finance built this way narrows the worker’s options. The money was meant to make another route possible, not make leaving the funder financially impossible.
The portfolio is where the uncertainty should go
There is a practical answer to the fact that individual attempts are unpredictable: stop requiring every individual attempt to work.
Ordinary investors spread money across a portfolio because different investments produce different outcomes. Diversification does not eliminate loss, but it reduces dependence on one result. The SEC explains the principle in those plain terms.
Human beings are not stocks, and a fund should not pretend that they are. The useful part of the analogy is smaller. A financier backing many defined opportunities can absorb uncertainty across the portfolio rather than trying to remove it from every agreement.
Some people will make the transition they proposed and earn considerably more. Some will make a smaller move. Some will discover that the planned direction was wrong, or that life changed before they could complete it. A few attempts may create valuable work without producing much additional salary at all.
If the portfolio only works when every person repays the full amount, it is a lending book. If it needs each participant to surrender more data, accept more monitoring or choose a safer career whenever results weaken, it has dealt with uncertainty by increasing control over the person.
A genuine investment model has to be capable of writing down an unsuccessful attempt. Returns from the successful cases, together with public, employer or philanthropic capital where wider benefits justify it, would have to cover the attempts that did not pay. The exact mix would be a difficult financial-design problem, but it cannot be solved by pretending the losing cases do not exist.
Personal intelligence should explain the attempt, not sentence the person
Personal intelligence could make this kind of finance more disciplined without pretending to make it certain.
Before the money is provided, the individual could use their own evidence to describe a bounded attempt: the change they want to make, what already supports it, what remains uncertain, what the funding will change and what useful progress might look like. During and after the attempt, the same system could help them compare the plan with what actually happened.
For our customer-support manager, the record might show that she completed the work, improved a real skill and made a credible attempt at changing roles, while the expected earnings increase did not arrive. Both belong in the account of what happened.
The financier does not need continuous access to her messages, calendar or private history to establish that. It funded a defined opportunity, not a licence to monitor the rest of her life. Nor should one unsuccessful attempt become a permanent low-potential label that follows her into the next application.
Failure can improve the next decision. It can reveal that the constraint was misdiagnosed, the market was weaker than expected, the support period was too short or the person simply preferred different work once they had experienced it properly. That information primarily belongs to the person who lived through the attempt.
At the end of the six months, she has to decide what to do next. She may use the new skill in her existing role, try again later or leave the whole idea alone.
The investor has to record a loss.
Both possibilities were present when the money arrived, even if only one of them appeared in the sales pitch.
Further reading: An Economic Perspective of Income Share Agreements, Consumer risks posed by employer-driven debt, and Asset Allocation and Diversification.