Fantex, Inc. announced today that it has entered into brand contracts with five Major Leaguers: Phillies third baseman Maikel Franco, Astros right-hander Collin McHugh, Orioles second baseman Jonathan Schoop, Twins right-hander Tyler Duffey and Padres third baseman Yangervis Solarte (as noted on BusinessWire.com).
Fantex offers professional athletes an up-front, one-time payment in exchange for a portion of that player’s future earnings both on and off the field. Fantex then sells “shares” of that player to public investors for a set price (thus covering the up-front payment to the player), allowing those investors to turn a profit if said player crosses a certain threshold in his career earnings. Obviously, that creates risk for the investors, who stand to take a financial loss if the player fails to earn enough money in his career to justify the shareholders’ investment. Angels left-hander Andrew Heaney became the first player to enter into an agreement with Fantex last September, taking a $3.34MM up-front payment in exchange for 10 percent of his future earnings. (Notably, the league and the MLBPA each approved that agreement, and Fantex’s announcement seemingly suggests that the same is true of these five agreements.)
As for the new wave of Fantex additions, Schoop secured the largest sum, agreeing to an up-front payment of $4.91MM. Franco, meanwhile, will earn $4.35MM, while McHugh will take home $3.96MM, Solarte will take home $3.15MM and Duffey will earn $2.23MM. Notably, Solarte’s agreement is for 11 percent of his “brand,” while the other four (and Heaney) signed away 10 percent.
With six big leaguers now on board in addition to 14 athletes from other sports, it stands to reason that the number of professional baseball players willing to enter into such agreements will increase. It’s an interesting proposition for Major Leaguers — not entirely dissimilar from agreeing to an early contract extension; in essence, the players in question are taking a life-changing sum of money early in their career in exchange for limiting their earning capacity once they’ve navigated through their arbitration years and entered their free-agent seasons. Those same principles are all true of players that sign contract extensions, though the extent of the up-front sum and the long-term risk obviously vary.
Beyond the long-term impact on a player’s earnings, it also seems plausible that players who enter into agreements with Fantex could be less likely to sign long-term extensions with their current club. Extensions, after all, are most often signed to provide a player with his first fortune in exchange for giving the club a discount rate on would-be free-agent or arbitration seasons. Heaney, Franco, McHugh, Schoop, Duffey and Solarte, though, have each secured a sizable sum without altering their free agency timelines, thereby creating less urgency to sign an extension. (It should be noted, too, that players like Duffey and Solarte aren’t necessarily obvious extension candidates in the first place.) It seems reasonable to expect that some players and agents will view Fantex as a means of locking in that first payday while preserving the right to get to free agency at a younger age. In a market that places a premium on youth — as evidenced by contracts signed by Jason Heyward, Justin Upton, Mike Leake and others — that comes with significant benefit.
The payments from Fantex, of course, are smaller than the sums that we’ve seen players haul in via contract extensions, but the trade-off that Fantex players face early in free agency figures to be more minimal than the trade-off of their peers that sign extensions. For instance, Giants lefty Madison Bumgarner will reach six years of Major League service time this season, but he remains under control for three more seasons; he’s guaranteed $11.5MM in 2017 and has a pair of $12MM club options on each of the two subsequent seasons. Bumgarner’s contract guaranteed him $35MM ($57.5MM if each of those options is exercised), but he’ll earn a maximum of $35.5MM over what would have been his first three free-agent seasons — a fraction of what he could earn were all 30 teams allowed to bid on him. Bumgarner’s open-market annual value could be $25MM or more over the life of a six- or seven-year term. Ten percent of a theoretical $150-175MM contract is a smaller loss for the player than the difference between the free-agent seasons on an extension and the aforementioned market value.
I should note that this isn’t a knock on Bumgarner’s contract by any means — it was a record-setting deal for a pitcher in his service class and comes with the same potential risk/reward that many early extensions carry. Conversely, Jon Singleton locked in $10MM and has yet to see his big league career get off the ground. If Singleton never develops into an MLB-caliber hitter, he’ll receive significantly more than he would have by entering into a Fantex deal. Balancing that risk and reward is likely something with which players and their agents will wrestle if Fantex agreements continue to increase in popularity.
From a more general standpoint, there’s quite a bit we don’t know about the finer details of Fantex. The method by which each player’s up-front valuation is determined, for instance, isn’t known. Accurate reporting of off-field income (e.g. endorsements) would be paramount (and is presumably mandated within the contract agreements), and the unproven model in question seemingly only works if Fantex is able to raise enough investor funding to finance the initial payment to the player. This is all relatively new territory, though, and additional information pertaining to the new opportunity for pro athletes should become increasingly available in the months to come.
Seems foolish to do in my opinion.
Franco is a premium player– let’s say he goes on to make $150,000,000 in his career, he’d be losing $11,000,000 on the deal. I don’t get it
4 mil now will be worth more than 4 mil in the future. I agree that it seems like a shortsighted deal on his part, but in that hypothetical he wouldn’t *really* be losing 11mil.
Yes, this is simple TVM. Present value is higher now than in the future.
Same thing as signing away free agent years, I suppose. Give up future dollars for guaranteed money today.
I think it makes a lot of sense. As talented as he may be, and even if he has absolute confidence in his abilities, he would have to make $50K before he’s in the “red” and that doesn’t account for present value, or the possibly investment return on the payment. In the meantime, if he banks it, he secures his future.
Yeah, in theory I agree with you, and I’m unfamiliar with Franco’s background, other than that he’s Dominican, so maybe this doesn’t apply to him specifically, but I’m speaking more generally anyways: if he left behind family and friends in poverty, the opportunity to make a quick $3.5 million is probably worth the difference between $150 and $135 million four years from now. It’s life-changing money either way in the future, but now it’s an immediate opportunity to support yourself and your family fairly well also
Think of this deal like insurance. If Franco or someone else were to have a injury (or worse) that prevented him from earning those millions of dollars, then at least he would still get a little bit for his talent.
I am thinking about the family of former Cardinals prospect Oscar Taveras. Most people assumed he would eventually make hundreds of millions too, but all it took was one accident for his family to remain in relative poverty. Of course his death was far more tragic than just the dollars and cents of the situation, but to ignore that possibility is just naive at best and foolhardy at worst.
BTW, in your example, Franco wouldn’t be losing $11MM because he never had it. He would gaining $139MM. Do you really think that $139MM isn’t enough for a person to have a financially independent life? And if your answer is yes, will that extra $11MM really satisfy you? The $4MM now is a guarantee, the $11MM later is a best case scenario. How often do best case scenarios really work out in life? Not very often.
Isn’t their enough ways to gamble?
Crazy your exactly right! But this is crazy!!
Perhaps if you were born in D.R. like Franco you’d understand why he is ‘losing’ 11 mil
Franco seems like a pretty solid bet to surpass $43.5mil in career earnings. Between 4 years of arbitration and the endorsement windfall of being (potentially) the face of the franchise in major media market, he could easily be 3/4 of the way there before his first FA contract – and he’ll be a relatively young FA, around 28. Maybe his 39HR pace he’s on right now isn’t sustainable, but even consistently posting half that number could get him close to $100mil FA contract.
The rest of the group, I’m not so sure about though. Solarte is a bit older and is a poor man’s Martin Prado – valuable sure, but I’m not sure how sustainable his production will be. Don’t know much about Duffey, and with Schoop, most 2nd baseman don’t sign mega deals.
But I would certainly buy some Franco stock, that looks like a no brainer
What will this do for the contract the player chooses to sign? I would think there are stipulations, but an investor would demand a player take the largest guaranteed money when a player hits FA, even if that’s not where the player wants to be.
Kind of seems like the players are banking that they will never be good enough to survive a non-tender situation.
Several won’t be. The odds say that you won’t get a major illness in your 20s or 30s, but you will definitely be glad to have health insurance if you “beat the odds” so to speak.
The part that gets me is just that the sums these guys took are very low figures relative to the MLB. You don’t have to be very good at all to make $2-4 million in your career.
That’s the thing though-they aren’t making $2-$4 million toiling away in the bigs. They’re making $2-$4 million today. I think it’s a smart idea, and I think these guys made a pretty good decision, especially Solarte and Duffey. Like another commenter said, $4m today is worth more in the future so when/if Franco signs a big deal he isn’t giving up a ton
You have to stick around at least 4-5 years to accrue $2-4MM. Most guys that come up do not stick around for 4-5 years and even then they would only lose $200-$400 thousand. It would take $43.5MM earned before Franco started to “lose” money. Go back and look at all the rookies in the 2011 season and then see how many have played 4-5 FULL seasons on the 40 man roster. It is a very small percentage. Don’t you think a guy like Darwin Barney or Brent Morel would have been better off signing a deal like this in 2011? Even a guy like Allen Craig, who was probably on Franco’s level in 2011, will only make $31MM in his career barring a miraculous comeback. It would only cost him a little over $3MM in this scenario and most guys aren’t signing a contract anywhere close to the one Allen Craig received.
Can someone walk me through the “$4m today is worth more in the future” logic? That one’s eluding me completely.
Taking a bit of an insurance payout up front in exchange for what could add up to be several times the initial payout.. it’s like banking on your on failure.
And that failure is a very real thing that happens to a great many players, so I get that side of it. But especially for Duffey’s figure, it seems like a very low payout — getting $2.23m is not really life changing when the minimum is $507k if all he does is stick in the bigs as a bad mop up guy. If he turns out to be any better than that, considering what a mediocre back of the rotation starter can make these days, and he could very plausibly be paying Fantex investors that $2.23m or more annually.
Time value money – Due to interest and inflation.
Give me $4M today, and I can put it in a secure investment and earn 5% on it. In 5 years, I have $4.25M. So the $4M today is worth the same as giving me $4.25M in the future. Can’t conversely, giving me $4M in the future is worth less than if you give me $4M today.
It’s just that it only makes sense if you have practically no earning potential going forward. Trading 10% for life – on top of agents and taxes and all the rest – when you could make that $0.25m in three months in the majors. It’s that 10% hit. Seems awfully steep for a 4m or less payout when it’s really not that unrealistic to make way more than that without even being around all that long. It’s like they’re counting on being out of baseball by age 29.
Then again, they’re probably thinking more like normal people than ballplayers. If you have the opportunity to sign a $10m/yr contract and you’re not an MLBPA mouthpiece you probably don’t care about paying an extra 10%.
The average MLB player makes about $20 mil in his career. Paying back 10% of that would be $2 mil and would be a positive investment for all these players. Most players don’t have incredibly long careers and the ones that do aren’t gonna be too upset that they’ll end up with $5 mil less money once they get a $100 mil contract.
It’d be 10 mil less on a 100 mil contract, and the difference between a 90 and 100 million dollar deal is a lot when we’re talking free agent destinations.
You get money up front and end up behind .. Unless your career doesn’t go anywhere. I guess the most confuzzling part of it for me is the relatively low 2-5m payouts versus that 10 percent number.
There is obvious risk on both sides of these deals.
However for a pre-arbitration player this is a great way to get some financial security and earn more now instead of waiting a few years to get those millions later in their careers.
This is brilliant for pre-arb guys. Like others have said, you have to make 40+ million to have a negative gain. If you get to the point you are a net negative, I’m sure you won’t regret it. Even if you sign a 200 million dollar deal for 10 years. You lose 2 million a year? Sure, big loss, but you’re bringing home 18million. That 2 million is worth less to you than the 4 million today. The 4 million they get today put them into a position where they can leave the game and be financially sound.
As for them having to sign the highest contract like another poster mentioned… I don’t see where fantex or anyone would have a say in where you sign. They get a cut of your future earnings, not future maximized earnings. If you are taking a hometown discount to sign somewhere, you probably are making them money regardless. The more you make the more they make, and I’m sure most are willing to bank on guys taking the biggest #.
Guaranteed money is worth immeasurably more than potential money to many people. Myself included. I would take $200,000 today for 10% of all my future earnings. Heck, I’d take 100 for 10% of my future earnings, and that would definitely be a big net negative. But, I save a lot of interest on house mortgage, loans, etc.
I think this is great.
Can’t wait for the first time one of fantex client decide to take a 10-20 million dollar hometown discount and the investors file suit.
Think about it. If you are an investor in a company, and that said company decides to willingly take a $20 million hit because they like where they are, is that gonna fly? I don’t think so.
I think this is a bad thing that is just gonna be a problem for all involved in the long run.
And please don’t tell me about the poor foreign players who have family to help and feed. When league min is in the quarter to half million dollar range, most of them are exempt from the draft and free to sign with anyone for alot more than a mid round draft pick and 3/4 of the minor league’s are making less than minimum wage, there is and have been suit filed for it. If you can’t “feed” your family on a half million a year, then there is a deeper problem.