Earlier this season, Fantex, Inc. announced that it had reached agreements with five new Major League players. For those unfamiliar with the concept, Fantex offers players an up-front sum of money in exchange for a percentage of their future earnings — typically 10 percent. Fantex essentially then treats the athletes as “stocks,” selling shares of the player to investors that stand to turn a profit if the player in whom they’ve invested ultimately earns enough in their career both on and off the field.
At first glance, a player who sells 10 percent of his future earnings for $4MM, for instance, would become profitable for the investors upon reaching $40MM in career earnings. Of course, there’s quite a bit more to it than that, as it remains unclear how taxes, Fantex fees, and yet other considerations are accounted for. All said, there’s quite a bit of uncertainty surrounding what is a fairly new concept; I took a look at some of the potential far-reaching impacts of Fantex deals when the last wave of deals was announced.
With six players now on board and a seeming likelihood that more will follow, we’ll keep a running list of the players that have entered into such deals. We’ll do so in this post and update each time that a new deal is announced. Here are the two initial groups…
- Jonathan Schoop, Orioles, $4.91MM guarantee (10% of future “brand”)
- Maikel Franco, Phillies, $4.35MM (10%)
- Collin McHugh, Astros, $3.96MM (10%)
- Yangervis Solarte, Padres, $3.15MM (11%)
- Tyler Duffey, Twins, $2.23MM (10%)
- Andrew Heaney, Angels, $3.34MM (10%)
Unsurprisingly, none of the listed players had reached arbitration eligibility upon signing their deal. Franco, Heaney and Duffey, in fact, each had less than one full year of Major League service time when agreeing. Players that have not yet qualified for arbitration are the likeliest candidates to enter into these types of agreements, as they make the most sense for both the player and the business. By the time a player reaches arbitration, he’s secured more than $1MM in career earnings (at least two full seasons of league-minimum salary, plus whatever arbitration number he has settled upon). At that point, a greater sum would need to be promised to make the deal worthwhile for him, thereby making it a more costly expenditure for Fantex. Presumably, the vast majority of Major Leaguers in these deals will be pre-arbitration players.
The greatest impact of these agreements seems likely to be a reduction in team-friendly contract extensions for pre-arb players. Certainly, the agreements in place for these players don’t mean that they’ll be completely closed off to signing a long-term contract extension, but it stands to reason that each would feel less pressure to do so with some significant earnings already in their pocket. A player who has already secured $2-5MM via a Fantex deal, plus several hundreds of thousands of dollars at the big league level may not still shy away from significant contract extension offers, but it’s easy to imagine those players steering clear of contracts like the ones initially signed by Salvador Perez (five years, $7MM) and Jon Singleton (five years, $10MM — though that one worked for the player, to this point, of course). As such, these deals have the potential to push a greater portion of players to the free-agent market down the road. Those shifting incentives, of course, have important implications for players, teams, and Fantex project itself.
Is there any prohibition against an MLB team investing in a player on Fantex?
Couldn’t a big market team use Fantex to create a steady stream of FA’s?
The answer for the first question is Yes.
And the second is a no, because it is prohibited for fantex investors to be affiliated with major league baseball.
fantex.com/baseballstockpolicy
Has anyone commented on the tax treatment of these payments to players? Pretty sure this is not treated as regular income, as they are selling an asset, the value of which would seem to be exactly what they’re getting paid. This would mean this payment is tax free.
It’ll almost certainly be taxed but it’ll almost certainly be taxed at a lower rate than income.
Curious if this will work for or against teams that like to offer pre- arb extensions. Guess it would just vary player by player. Obviously if you’ve already got a fantex deal an early extension would be less likely, but what about when deciding between the two?
“I don’t need to take your offer team, I’ll go to fantex instead!”
“Hey look player, we can offer you just as much as fantex is AND you don’t owe us X% of your future earnings!”
So basically it’s a “payday loan” service coupled with outside investors charging crazy interest on future income? Smart investment if you know baseball and have a decent amount of disposable income for high risk/high reward investments.