Opportunity In Income Share Agreements

Recently I’ve been researching human capital contracts, also known as income share agreements (ISA’s). The interest came from a subway conversation and a desire to scale my current efforts in assisting minorities through a for-profit effort.

Originated by Nobel Prize winning economist Milton Friedman, human capital contracts are contacts in which an investor(s) finances a student’s education in return for a small share of their future income.

Students no longer go into debt (unlike private loans) and are given contracts based off of past performance (unlike FASFA’s). The financial risk transfers from the student to the investor. With aligned incentives, it also encourages a a mentor-mentee relationship.

A proven economic solution in other countries including Australia, why haven’t human capital contracts been used to help combat the US problem of 38 million students in debt? To arrive at an answer, I’ll explored the road blocks and reasons against ISA’s.

Indentured Servitude & Slave Comparisons

The term “human capital contracts” attracts a negative connotation. Often compared to indentured servitude, their is an icky stigma associated with the term. This isn’t valid because students aren’t forced to make career decisions or give up a percentage of their assets, only income. Furthermore, a price ceiling can be set on salary to protect students. If an investor were to own 5% of the next Zuckerberg’s salary the return on investment would cap at a certain amount. With complete autonomy, the comparison of human capital contracts to indentured servitude is groundless.

Other Loans

While the proposed human capital contract covers tuition, that is only half the battle for students. According to CollegeBoard, tuition and fees constitute for 39% of total budget for in-state students living on campus.

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Average Estimated Undergraduate Budgets, 2017–18

Because human capital contracts fund student education, students would still be in debt in addition to owing a percentage of their income. This argument is economically invalid because students, unlike private loans and FASFA’s students do not have the tuition debt risk.

In Practice

Prior to the JOBS Act, multiple startups attempted to bring human capital contracts to market. Only Lumni — a South American focused company, still offers the service. Pave, Upstart and Fantex (athlete focus) all raised capital but pivoted due to failure to penetrate market through lack of network effects and lack of accredited investors.

Recently, several startups have entered the market. Vemo Education which launched after the JOBS Act raised $7.4 million in capital this past fall. In 2016–2017, the company facilitated $23 million in agreements working directly with universities and software engineering schools such as Purdue University, Clarkson University, and Holberton School. Align Income Share Funding offers students up to $12,500 in as little as a day. App Academy, a software engineer bootcamp, only charges students when they’re hired.

Furthermore, this model is successful in the public sector. In Australia’s Higher Education Contribution Scheme, student debt defaults don’t occur— students begin education repayment after they begin to earn a salary. South Africa, the United Kingdom and Hungary have adopted similar models. In the United Sates, Purdue University and the University of Oregon are running ISA pilots.

With ISA’s experiments occurring, it is yet to be clear whether contracts will be facilitated by private companies or for-profit sectors.


Before the Jumpstart Our Business Startups Act (JOBS) created by Barack Obama only accredited investors were allowed to invest in ISA’s. An accredited investor is someone who meets financial criteria:$2 million in assets or $200,000 in salary for two years. This JOBS act allows non-accredited investors to invest insecurities. According to the Securities Exchange Act of 1934, the definition of security is an investment contract, which is later defined as a “contract, transaction or scheme whereby a person [1] invests his money [2] in a common enterprise and [3] is led to expect profits [4] solely from the efforts of the promoter or a third party.”

Does a human capital contract count as a security? The answer is yes.

A potential problem is the high operational cost and complexities for students in creating a security such as submitting financial statements, annual reports, personal income tax return, voting rights, business plan. The cost of educating an individual about a new form of student loans at scale is significant. When raising over $100,000 the student would have to provide investors with financial statements that have been reviewed by an independent public accountant. This makes filling out a FASFA look easy.

Would the benefits of the JOBS act outweigh the switching costs of filing a FASFA? One potential way to mitigate the switching cost would be by creating a funding portal platform for education on human capital contracts and assistance with the formation and upkeep of an LLC.

Change in Network Effects

Prior to the JOBS Act, the pool of potential investors was extremely limited. These accredited investors, aka the wealthy, represent a different segment of the population than students looking to issue human capital. The market distinction between the buy and sell side reduced the possibility for network effects and forced funding portals to market to both sides individually. The JOBS Act solves the network effect problem by allowing others to participate. Most importantly, students raising capital are incentivized to promote the funding portal to their community, thus raising awareness and leading to low cost network effects.

Conclusion: The recent change in federal policy allowing the average citizen to invest unlocks the potential for network effects and mass adoption human capital contract startup in the form of a crowdfunding education portal.

Surprisingly unattempted, a crowdfunding portal to finance education has clear potential. A student can raise debt free capital from a combination of friends, family and investors.

The diverse range of individuals who would participate in funding a students education creates a combination of altruistic and financial incentives. If Jimmy from the neighborhood reaches out to family and friends, they now have a way to contribute to his education and see a return.

Now I know what you’re wondering — does this mean that you’re going to start a human capital contract business? Not quite. While a viable market opportunity is apparent with a clear way to penetrate the market, a few key questions remain.


  • Why hasn’t Lumni advanced in the US market?
  • Why is Vemo Education exclusively a B2B solution?
  • Why you?

The important question is why you? Of all people who are going to accomplish this mission, why are you most qualified? In looking objectively at my situation — the fact is that this isn’t a problem that I have experienced.

While I do understand the financial struggles of underrepresented groups, I personally have not faced this problem. I don’t have industry experience.

The CEO of Vemo Education Tonie DeSorrento, has a decade of experience in legal practice, the founder of Align Income Share Funding previously started a lending company.

  • I do not have strong resources in the industry.

Who with the right skillset is going to join me on this mission?

  • My knowledge is relatively limited and purely academic.

Alana Anderson’s article “From Education to Enterprise” does a good job at explaining this disadvantage.

  • High legal barrier to entry.

On the contrary, entering a market with a fresh perspective can be seen as a strong advantage. Unlike the founders listed above I’ve recently seen the pain of friends having to deal with loans and others not believing that they can afford an education.

Finding problems to solve isn’t hard. What is difficult is choosing the right one.


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danilovicioso.com is a work in progress

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