My Thoughts on “Human Capital”

Over the last few years we have seen a number of ambitious projects that look to improve access to opportunity, and help people achieve their full potential. Lambda School is offering a high-quality education in computer science, financed by a portion of your future income. People like myself and Mike Merrill, have issued shares in themselves which are available for anyone to purchase.

Life capital includes any project that looks at tapping into the vast amount of human talent available in the world and helping people reach their full potential. Access to talent is universal, but access to opportunity is not. Human capital experiments are attempting to address this problem in creative ways to help high-potential individuals use their skills to make a difference by introducing them to the opportunities they need to thrive.

This could come in the form of pooling your future income with friends, selling shares in yourself, paying for your education through an ISA, or anything that helps access the potential of ambitious people who could make a bigger impact.

To continue the conversation further, I wanted to analyze in-depth the different ways in which we can look at human capital, and what has already been done as part of this movement. I will cover the proliferation of ISAs, the potential of publicly traded people, and what these have taught us about human capital.

Publicly Traded People

Last November I listened to an episode of Village Stories featuring Mike Merrill, a man who had been “publicly traded” since 2008. He had relinquished a large amount of control in his life to shareholders, who advised him on matters both personal and professional. The concept of publicly traded people interested me so much that I decided to reach out personally and find out more about the project. The idea is that a human would issue shares in themselves, like a company, and offer shareholders the ability to earn a return if they advise the person successfully.

The end result of my research was my decision to become a publicly traded person. I sell shares in myself in exchange for the ability to vote on decisions in my life. So far, shareholders have voted on everything from my starting a pescatarian diet, to how I should manage my social media presence. My motivation behind becoming a publicly traded was simple - I was interested in leveraging the power of community. Merrill described his being publicly traded as “Community Through Capitalism”. Through this project, I have been able to cultivate a loyal community of people who are literally invested in my success and have ultimately helped me make better decisions.

The beauty of the concept is that shareholders have a financial incentive to help the person succeed. If they provide their investment with advice that has a positive impact on my life, the person’s share price should appreciate which will result in a profit for the investor. The opposite is also true, which reduces the risk of bad actors who are only interested in profitability. If the investment is not happy and productive, then they can not yield a profit for shareholders. This reduces the risk of ethical exploitations of the system and “shorting” stock because the actions of the shareholders are directly correlated with the success of the investment.

Being publicly traded allows anyone to develop their own community, using the power of capitalism and the model of the stock market to create an environment where people could invest in their future, and earn a potential return for doing so. Whenever I need advice, my first call is to a shareholder, who is willing to give me a few moments of their time and help guide me on the right path. This model has offered the ability for one to cultivate a community where incentives are aligned, which has resulted in shareholders being proactive and always happy to provide me with advice as what’s good for me is good for them.

Another advantage of being a publicly traded person, which is not so obvious, is that it inspires a change in mindset. As a publicly traded person, I have felt an increased sense of productivity and accountability because my shareholders rely on me to make progress so that they can yield a return. I feel like I need to demonstrate progress on a weekly basis to showcase my potential to shareholders and renew their confidence in me, which helps me work at my best and maintain a low level of stress to propel myself forward.

There is, of course, a negative side to this - being publicly traded could impose on one a high level of stress. The commitment to transparency that is required in being publicly traded could result in people becoming too stressed and fantasized with profitability over their happiness, which is why the model is incompatible for many people. Instead, I believe that we can learn from the project and take the financial incentive for investors, and adopt a mentorship-based model rather than a decision-based model. Avenify, who allows you to invest in people’s college through ISAs, have realized this and adopted a model based on financial returns, rather than personal involvement.

I have also observed a rather interesting trend - shareholders are less interested in the monetary returns of investing in a person. The majority of my shareholders have not sold their shares in me, and are interested in guiding my success in the long-term, rather than the prospects of short-term gains. My shareholders understand the responsibilities associated with investing in a person and believe that the experience of being able to guide a young person on the right path is liberating and more important than the potential financial returns.

One of the major problems with this concept is that it requires a lot of commitment - although that may also be a good thing. I feel that the concept of publicly traded people offers a lot of benefits, but surrendering control over some of your decisions feels like a big risk for many people. Imagine a platform that allowed you to invest in people through a non-stock market system, but still offered financial returns through a model like an ISA - a Kickstarter for people platform. I can see this becoming the next big thing in human capital. Upstart tried this a few years back, but there was not enough demand for the idea to advance, and they ended up successfully pivoting to loans.

A bigger issue to consider is the ethical ramifications of issuing shares in oneself. Can one’s contributions to society truly be measured by a single figure in the form of a share price? Many people are reluctant to invest in people through a publicly traded person model because they do not believe that any number can accurately represent somebody’s contributions to society. Perhaps assigning someone a number would be demotivating and make them feel as if they are not contributing enough. The overall question for your contemplation is: Should we actually be tokenizing people, from an ethical standpoint? When asked about this question, one of my shareholders replied the following:

"As an investor in a publicly traded person, I'm always thinking about the ethical implications when voting on decisions that will impact their lives. Is this the right thing to do? What are the long term implications? Companies can recover from bad decisions, but human beings are different.”

This effect would be amplified if a lot of people adopted a similar model, or if a platform based on trading tokens in people (this would most likely happen through using cryptocurrencies) was to make the concept more mainstream. People would consistently be comparing their share price to that of others and may result in a decreased state of productivity, fear over their contributions to work and society, and overall make people feel as if they are not achieving as much as they should.

Personal Boards

One of the less formal ways one can explore human capital is through the concept of personal boards. This already happens informally, where you will develop your own personal community of people with whom you interact on a regular basis, but there is an opportunity for this to be expanded to have a wider definition involving mentorship.

A personal board is a community of a few people with whom you keep in the loop about your life, and communicate frequently. These people act as your advisors who are willing to get involved in the intricacies of your life and help you understand the barriers you are facing and overcome them. You could invite experts, your friends, family members, mentors, and anyone else who you believe would be able to contribute to the discussion, and introduce them all to each other, so they can help you make decisions based on their collective experience working with you on both a personal and professional level.

This could be through a formal arrangement where you meet on a predefined basis and establish and review your personal Key Performance Indicators (KPIs), or through a more informal setup where you send a monthly email to board members and ask for advice when you need help. For this model to be effective, establishing KPIs would be necessary so that progress can be compared between meeting and detailed plans can be drawn up about the future direction of a person’s life.

This concept could also experiment with ISAs, where those who participated on someone’s personal board could earn a small portion of their future income in exchange for their advice. Furthermore, a person could offer the ability to invest in their next company through pro-rata rights to their personal board, further incentivizing their board to provide them with more in-depth and actionable advice about their life.

In fact, people that want to participate in personal boards may opt to not take any compensation for their services. If someone wants to mentor you, they may prefer to feel as if they are having an impact on the life of an ambitious person than the potential financial returns that they stand to gain. An environment based on sharing success and collaborative improvement and iteration would thus form, reducing the risk of bad actors influencing your decisions, as present with the publicly traded person model. The ethics of developing a personal board are also less concerning, as you would be able to select the people whom you believe would have the greatest impact on your life, and you would retain full control over the process.

Income Share Agreements

Income Share Agreements, or ISAs, are a legal document which offers a debt-free alternative to loans. ISAs allow a student (or lender), to receive interest-free funding from an investor. In exchange for this, the lender agrees to share a percentage of their future income with the lender, normally on a monthly basis. Income Share Agreements have the potential to completely disrupt the student loans industry and could have wider applications that allow people to pursue their own education, regardless of access to capital which was previously a major barrier.

Perhaps the most popular example of ISAs being used successfully is Lambda School, an online boot camp that trains students to become software engineers without paying any money upfront. Lambda allows their students to pay 17% of their income for the first two years that they are in employment, capped at $30,000. This only comes into effect when the student is making a minimum of $50,000 in income. Students can also pay $20,000 upfront if they would prefer.

This model has allowed Lambda to offer students a professional education in computer science without requiring them to have money to pay for it upfront. By using an ISA, students who do not earn over $50,000 after Lambda School will never have to pay for their education, which aligns the incentives of both students and Lambda. If Lambda School helps them get employed in a career in software engineering, they will earn a return. However, if they do not, then the student will have to pay nothing back - the ideal scenario. This is fundamentally different from the traditional student loan model, which requires people to pay back money, regardless of their income or job.

ISAs have the potential to completely disrupt the way that we finance education. By offering a portion of your future income in exchange for your education, people do not have to worry about incurring debt and the costs associated with that debt. Students would no longer have to worry about the burden of finding work to ensure they don’t default, and would not have to carry the thought of how much money a job would make when they are making choices about their career.

According to Karthik Krishnan, an associate professor of finance at Northeastern University who specializes in student debt research, a person with $30,000 in student loans is 11 percent less likely to start a business than a person who graduated without incurring debt. ISAs offer a way to finance your future without incurring debt, so people are free to pursue whatever path they want — whether that be in terms of a future full-time job, internship, or starting a business — without having to find a way to finance their ventures and pay for the debt they have incurred.

Outside Applications

Another interesting angle to ISAs is how they can be applied outside of traditional education. Imagine if you were to sign an ISA with your most influential teachers at high school or in college. If they helped you succeed, they could earn a portion of your future income. This would provide them with a financial incentive to be more hands-on and engaged, and overall provide you with a better educational experience. If you turned out to be the next Elon Musk, the teacher would profit nicely for their part in your success.

There is also the possibility that you use ISAs with your friends. If you are working on an essay or a blog post then your friends may offer to help by writing comments, but they may only look at it for five minutes. If you had an ISA with them, they would have a financial incentive to help you succeed, and may, therefore, spend more time reviewing your essay, and schedule a follow-up call with some feedback on how you can improve. This could even extend to managers at companies, who could earn more money if their subordinates earned a promotion.

ISAs could also be leveraged to create an index fund of people, or an Exchange Traded Fund (ETF), which would allow you to diversify your portfolio in one investment as the fund would be tied to the success of a group of individuals. Aside from the diversification benefits, an index fund for people would also reduce the risk of borrowers worrying about their success as if they have a down month, then investors can still yield a return based on the aggregate result of a group of people.

As aforementioned, Income Share Agreements could also pave the way for a “Kickstarter for People” platform, that allowed you to invest in the people you believe in — entrepreneurs, designers, salespeople, artists, et al — for the potential of a return. A “Crowd ISA” model could be developed, based on the same fundamental principle as the “Crowd SAFE” (Crowd Simple Agreement for Future Equity) used by Republic for startup investing, offering the ability for a community of people to earn a percentage of someone’s return proportional to the size of their initial investment.

Financial Markets

As highlighted throughout this article, one of the most interesting aspects of human capital experiments is the financial returns that it can yield.

There are, however, some downsides to tokenizing human capital. The first, prevalent in both Income Share Agreements and selling shares in oneself, is the potential rise of secondary markets wherein people trade stakes in other people without their knowledge until the trade is done. This is very common in the real estate market and primarily used to liquidate capital as soon as possible so lenders can issue more loans.

A secondary market would allow for people to potentially validate stereotypes and run data analysis on who can generate the highest returns from a statistical basis, meaning that the market would become less about people raising money, and more about capitalists attempting to earn a strong return, to the detriment of the people who have actually raised money through an ISA or through share issuance.

This presents the opportunity for people to end up holding a stake in someone’s future success who may not have their best interests at heart and may, therefore, provide poor advice to maximize their profitability, rather than their happiness. In addition, a secondary market would allow people to get in on missed opportunities and be able to participate in the journey of a person who has already demonstrated success but need a little boost to reach their full potential.

On the other hand, a more official and regulated secondary market for shares in people or ISAs would mean that those who hold a stake in one’s future success could trade that stake to someone who could provide them with better advice. This would mean that if someone could not help the person they had invested in, they could instead refer them to another person who could accelerate their success by providing advice, opening up their network, or acting as a mentor.

Selling an ISA or a share in someone may also be perceived as a sign that the lender no longer has confidence in their work and ability to become successful. This may, therefore, cause people to optimize for profitability rather than pursuing their dream career, which would ultimately harm the person who chose to pursue an ISA as a way to access more freedom. In addition, selling an ISA may also bring additional complexities to the process, including legal changes to contracts, due to the unclear regulatory environment at present.

There is also the ethics of this to consider. Trading a share in someone’s future success on a secondary market would allow people to essentially exchange shares in others without their knowledge until the transaction is complete. People would be able to sell their stakes in others without requiring consent, which not only introduces more risk for a person to hold, but may also cause additional ramifications if the investor does not care about the person’s success, but rather profits.

Slavery and Involuntary Servitude

Throughout this post, some of the most prominent ethical considerations in trading human capital have been addressed, however, the question of indentured servitude has not yet been addressed. The argument is that by purchasing a share in someone, you would be able to wield an unnecessary amount of control over them, and thus cause them to perform actions that they otherwise would not provide. Patri Friedman highlighted these concerns in a thread about the prospects of a secondary equity market:

To address this argument for ISAs, it is important to understand that they do not actually entitle the investor to decision-making control or other authority in a person’s life, and also do not allow them to claim any assets if the person does not yield a return. Therefore, ISAs cannot lead to slavery or other forced work because the document does not give this authority to the investor. Most, if not all, companies that are offering ISAs follow industry-determined best practices and have integrated provisions to clarify the role of the investor in their life.

In terms of being publicly traded, this argument is more prominent. In the current form of being able to influence one’s decisions, the problem of slavery is the first thing people think about when they consider the negatives of the model. Theorist and philosopher Steven Lukes defined three faces of power, and the second face (the “open face of power”) addresses this argument really well. It states that the person who has control over the agenda — the person that sets the terms for a decision — therefore have the most power as they decide what other people can decide upon.

Tokenizing people and offering decision-making power is one of the major components that make the concept of publicly traded people really interesting. You can invest in people, and that allows you to help inform their decision making in a formal way, allowing you to guide them to success and happiness. However, the person who is publicly traded can choose the form of the experiment, the questions being asked, and whether or not they are binding, as a condition of investors’ pledging money, which means that slavery cannot occur.

The important thing to note is that while human capital solutions like personal boards and ISAs have the potential to grant someone a portion of their future earnings, they do not represent an actual stake in the person. While ISAs and such are compared to equity, that is in part due to the fact that no money is borrowed, and does not constitute a legal share in that person. When legislation is enacted that addresses ISAs, there will be provisions included to ensure that all ISAs meet ethical standards and offer strong consumer protections.

Regulatory Landscape

The regulatory landscape of ISAs and other solutions such as equity investing in people is unclear. However, ISAs offered by companies like Lambda School, Pathrise, and others using the model, all operate under strict best practices and are legal under current U.S. law. These companies take into account the issues with ISAs and have implemented strict consumer protections and disclosure requirements in order to provide a strong experience for both themselves, and the people in which they are investing.

This is all changing, with Income Share Agreements becoming more common. The “Investing in Student Success Act” has been proposed in both the U.S. House of Representatives, and the Senate, which aims to regulate ISAs and clarify their definition under the law. This act would exclude ISAs from the classification as debt instruments, and instead treat them as education loans, which would mean they cannot be discharged in the case of bankruptcy.

The bill, if enacted, would also establish a set of standard terms which must be included to protect the person raising money, and require issuers to offer consumer protections, and offer fair terms as deemed by the government. The act also excludes ISA issuers from complying with the Investment Company Act of 1940, meaning they would not be subjected to the strict regulations and disclosure requirements that investments firms most follow.

Following firmer regulations, the ethical questions surrounding human capital solutions will become less prominent, as there will be specific legal protections that ensures that people cannot be exploited through offerings such as Income Share Agreements. There has not yet been much action by other governments in regulating ISAs, although this can be attributed to the fact that most ISAs are currently offered in the U.S. only, and the document is yet to be explored in other markets (although this does offer some exciting opportunities for the future).

Closing Remarks

Over the next few years, we are most likely going to see more ambitious projects that look at securitizing and tokenizing human talent. There is an unlimited amount of untapped human potential available in the world, and there is now a community of dedicated people working on trying to ensure that people have access to all of the opportunities they need to thrive.

Whether it be through Lambda School and teaching people how to code, or being a publicly traded person and inviting people to help you make decisions, life capital solutions will offer great opportunities to unleash the full human potential in the future. There are a lot of people who are taking these models and expanding on them further in order to make investing in people more efficient through a plethora of different methods.

This space is constantly growing, and every day there are new players coming into the market. If you are building anything in this space or would like to talk more about life capital, please reach out to me on Twitter.

For further reading, check out this article by Erik Torenberg where he does a deep-dive on ISAs and human capital, and this article by Avenify, which explores the past, present, and future of Income Share Agreements.