Interesting Collin McHugh article

[juliogotay]

http://www.crawfishboxes.com/2016/5/4/11590126/collin-mchugh-invests-in-himself

[jbm]

Like most articles over there, it appears wanting. 

It's a no-lose situation from the player's perspective.  If McHugh busts, he earns $4M, plus whatever salary he makes as a MLB player, minus 10%, which could be a trivial number compared to that $4M. If he's even mildly successful, he stands to earn more by taking an at-market deal minus 10%, plus $4M than he would if he took a below-market deal earlier in his career, for financial security.

I may be missing the gist of it all, but if he is good enough to earn a lucrative contract, that 10% could well exceed his 4 million.  Most people would count that as a loss.  And why would a team offer to pay off that 10% "tax" with a larger contract, when their pool includes options without that tax?

Also, from the perspective of someone who would buy this stock, why would you invest in a asset who doesn't expect to make it big.  The whole thing seems squirrely. 

[mrpink]

I may be missing the gist of it all, but if he is good enough to earn a lucrative contract, that 10% could well exceed his 4 million.  Most people would count that as a loss.  And why would a team offer to pay off that 10% "tax" with a larger contract, when their pool includes options without that tax?

Also, from the perspective of someone who would buy this stock, why would you invest in a asset who doesn't expect to make it big.  The whole thing seems squirrely.

I think you are missing the gist of it all.  The tradeoff for that 10% exceeding $4MM is having that $4MM in his hand right now.  If his arm gets run over by a tractor tomorrow he's still set for life.  It's essentially insurance, no one said he doesn't expect to make it big.

[jbm]

I think you are missing the gist of it all.  The tradeoff for that 10% exceeding $4MM is having that $4MM in his hand right now.  If his arm gets run over by a tractor tomorrow he's still set for life.  It's essentially insurance, no one said he doesn't expect to make it big.

I understand that part, but if he gets a four year/60 million contract, 6 million goes to that company.  That's a loss, and the article said it was a no-lose situation from a player's perspective.  That statement, and the expressed idea that a club would willingly add 10% to an offer (when their market includes options where this isn't required), was my beef with the substance of the article.

[juliogotay]

I understand that part, but if he gets a four year/60 million contract, 6 million goes to that company.  That's a loss, and the article said it was a no-lose situation from a player's perspective.  That statement, and the expressed idea that a club would willingly add 10% to an offer (when their market includes options where this isn't required), was my beef with the substance of the article.

I would seriously think about giving up the possibility of $6 million sometime in the future for $4 million today.

[moriartp]

I would seriously think about giving up the possibility of $6 million sometime in the future for $4 million today.

Yep. On a $60 million contract, he'd take home $58 mil (including the up-front payment). If I'm McHugh—who didn't get a big signing bonus, isn't elite, and won't hit free agency until the wrong side of 30—that's a no-brainer. Any given pitch might be the one to end his career. Why risk it?

[homer]

That's a loss, and the article said it was a no-lose situation from a player's perspective.

Money is not the only thing in the equation.

[das]

Money is not the only thing in the equation.

And, the value of money, which is different for each person, is also different through the trajectory of a career.

[chuck]

I would seriously think about giving up the possibility of $6 million sometime in the future for $4 million today.

No-brainer, for all sorts of reasons. We just made up the $6 million side of it but for me it holds true even as you adjust that number upward. No-lose is not how I would describe the deal but it's a pretty simple exercise in risk management.

[juliogotay]

No-brainer, for all sorts of reasons. We just made up the $6 million side of it but for me it holds true even as you adjust that number upward. No-lose is not how I would describe the deal but it's a pretty simple exercise in risk management.

Plus the power of having the money now making money for you. And whom among us think taxes are going down?

[jbm]

Wait, wait, wait.  There are two sides to this deal, and unless this insurance type company has no idea about the concepts of risk management, they figure to either make money on this deal or in a pool of many similarly structured deals. 

[Reuben]

No-brainer, for all sorts of reasons. We just made up the $6 million side of it but for me it holds true even as you adjust that number upward. No-lose is not how I would describe the deal but it's a pretty simple exercise in risk management.

Exactly. If this had been offered to Altuve a few years ago, he would've been way better off doing that than the deal he understandably signed with the Astros. Those kinds of early-career team-friendly deals are going to get very rare very soon now that this option exists.

[moriartp]

Exactly. If this had been offered to Altuve a few years ago, he would've been way better off doing that than the deal he understandably signed with the Astros. Those kinds of early-career team-friendly deals are going to get very rare very soon now that this option exists.

Precisely this. It's a much better option for the players. They can still get the financial security while keeping their future earnings much closer to market value. Owners are going to hate it, but fuck 'em anyway.

[pots]

From what I read, McHugh doesn't get squat until Fantex is able to sell 3.96 million in McHugh stock options

[jbm]

Exactly. If this had been offered to Altuve a few years ago, he would've been way better off doing that than the deal he understandably signed with the Astros. Those kinds of early-career team-friendly deals are going to get very rare very soon now that this option exists.

Huh?  This is the exact type of deal the company would make a killing on.  If he didn't sign a team friendly deal, he would soon have a contract making 15+ million a year, 10% of which would be going to this company.  This company could conceivably bank 8 figures on a guy like Altuve.

Altuve didn't have bad luck that this deal wasn't around; Altuve just shouldn't have signed his deal.

[pots]

Huh?  This is the exact type of deal the company would make a killing on.  If he didn't sign a team friendly deal, he would soon have a contract making 15+ million a year, 10% of which would be going to this company.  This company could conceivably bank 8 figures on a guy like Altuve.

Altuve didn't have bad luck that this deal wasn't around; Altuve just shouldn't have signed his deal.

The company sells stock in the player, making money on something like transaction fees.  investors would have made a killing off of Altuve, but may take a bath on Singleton.   

[jbm]

From what I read, McHugh doesn't get squat until Fantex is able to sell 3.96 million in McHugh stock options

Yeah, reading the article again, I am more confused

As reported, McHugh's deal will pay him $3.96 million right now, contingent on Fantex being able to raise that money by selling stock against 10% of McHugh's future earnings on and off the field.

One thing, it apparently includes off-field income, which would include endorsements.  Might be significant with someone like Altuve; maybe not for someone like McHugh.

As to the stock, this is baffling.  I have no idea how such a market would look like in the real world. 

[chuck]

Altuve just shouldn't have signed his deal.

Sure, but no one knew that then. Injury, poor performance, who knows. Altuve's signing the deal he did is similar in spirit to what Fantrax is offering McHugh - he took the money that was on the table rather than risk a much worse outcome. But the Fantrax deal allows a player to bring in money TODAY, which is huge, AND it allows them to seek market value for themselves as soon as they can.

The question implicit in your grappling with this is why would anyone want to bet on Colin McHigh to be worth in excess of $40 million dollars in the future and that I'm afraid I cannot answer.

[chuck]

As to the stock, this is baffling.  I have no idea how such a market would look like in the real world.

Probably a lot like the junk bond market.

[jbm]

The company sells stock in the player, making money on something like transaction fees.  investors would have made a killing off of Altuve, but may take a bath on Singleton.

I still don't understand.  Would the 10% of player income stream be transferred to stock owners like a dividend?  and Would the options (or whatever they would be called) be tradable on an open market?

[VirtualBob]

One thing, it apparently includes off-field income, which would include endorsements.  Might be significant with someone like Altuve; maybe not for someone like McHugh.

So if he gets hurt, quits, and goes to sell used cars, does his income from that benefit the stockholders too?

[moriartp]

From what I read, McHugh doesn't get squat until Fantex is able to sell 3.96 million in McHugh stock options

That's how it looks to me, and my feelings are the same as chuck's—I can't fathom why an investor would bet on McHugh topping $40mm in future earnings.

[Navin R Johnson]

And if the Astros thought he was going to be good, couldnt they just offer him something similar like they did Altuve?  And then McHugh wouldnt be giving up 10% of his salary going forward??

[pots]

I still don't understand.  Would the 10% of player income stream be transferred to stock owners like a dividend?  and Would the options (or whatever they would be called) be tradable on an open market?

Well I assume they'd look at it like this.   10% of McHugh's future salary is worth 3.96 million.  Then they'd come up with a number of stocks to make it purchasable to all.  So let's say 100,000 stocks.  Each stock's initial value is worth $39.60 until all sold.  Each stock will net you .0001% of McHugh's future salary.  So if you ponied up 39.60 and purchased a single stock in McHugh and he ends up making 100 million lifetime.  you get 100,000,000*.000001 = $100.  So basically an approx. 10 year investment value of $39.60 nets you 100 dollars.  You would basically 2.5x your money in that case. 

[jbm]

I guess they won't break his arm if he refuses to pay.