Demystifying Income Share Agreements in India.
Ever wondered how to get your teachers care more about your success? Here’s a solution.
Although it has been around for ages, Income Share agreement (ISA), is a very new concept to students in India. In times when both coaching class fees and college fees are skyrocketing without a change in their results, it is worth giving this alternative a try.
So first and foremost, what on earth is an ISA?
An income share agreement (or ISA) is a financial structure in which an individual or organisation provides something of value (often a fixed amount of money) to a recipient who, in exchange, agrees to pay back a percentage of their income for a fixed number of years.
Ahhhh, finance-legal mumbo jumbo alert! Let’s take it easy and dive into a story.
Take two people, Nida and Melon Musk. Nida is a bright student, and she works hard. But Nida comes from a background where she can’t afford to go for higher studies or for that job training course, even if she gets some scholarships. Nida’s first option is to take a student loan, which requires collateral and proof that she can pay them off by some means or the other even if she doesn’t have a job. Nida doesn’t have these. Even if she did, she knows student loans are a huge burden on her, and the interest rates are made to drain out a huge part of her income in the coming years. ☹️
This is where Mr. Musk steps in. He’s heard a lot about Nida’s potential and being a compassionate man, understands her situation too. But Melon Musk didn’t reach where he is by giving handouts to people. He doesn’t believe in charity. So he suggests that Nida should sign a legally binding contract with him wherein in exchange for the funding, she promises to pay a percentage of her income to Mr. Musk upon getting a job. Till then, she’d not be asked for a penny. 😲
Nida realizes that Mr.Musk is investing in her and thus the amount she has to pay him back is more than the costs that she’ll actually incur. Which means that Mr. Musk, being the businessman he is, is expecting returns on his investment. Nida considers this a positive thing seeing that Mr.Musk believes in her to actually achieve something.
But Nida, like all of you reading this for the first time, is skeptical. And rightly so. Legal issues must all be carefully considered before proceeding with. So Nida raises her concerns.
“What numbers would you be comfortable with? Because I don’t wanna be paying you and ending up with nothing every month for myself!”
Musk replies that this is the prime reason why he is choosing to take a percentage rather than a flat amount. The percentage will be 12% for 3 years which means a small chunk of Nida’s income would be coming to Mr. Musk over a longer period, so she can manage herself and her needs. Nida understands that this is a very acceptable number and she can comfortably live if she earns a decent pay. But… What if she doesn’t?
“What if I do poorly and earn a very low amount? An amount on which the 12% hardly covers what you have invested in me! Also what if after I pay you monthly I don’t have enough for my needs?”
Mr. Musk understands this situation. So he says, “If you earn below a certain amount that we both agree is appropriate a lower cap, you don’t have to pay me anything!”
Now, Nida is more worried! How can he afford to do this? This doesn’t sound right!
Mr. Musk looks at her and understands her concerns. So he says, “This is why I will use all my resources to make sure that you get the best education and opportunities you deserve. I will clear any doubts that you have, help you connect to my network, help you land good opportunities. This provides me an incentive to care about your success unlike banks who just give you money and expect more money in the future.”
So instead of only providing her with money, Melon Musk is also adding value in lots of other ways! He will help her grow and reach her potential, connect her with people she in no ways could’ve herself connected with and land a really good career. Clearly, this arrangement is in the best interest of both of them! It’s a win-win lose-lose situation, instead of a loan in which case the bank wins no matter whether you win or lose. Upon realising that the financier is on her side, Nida thinks this is a brilliant idea and that they both have incentive to achieve mutual success!
“What if I get a really good job? Wouldn’t the amount I’m paying you be huge? More than the value you’ve provided me for getting through college?”
Melon then counters with another caveat, “If you earn higher than an upper cap that we both agree on you pay me a fixed amount calculated for the cap, rather than it being a percentage. So for example, we decide that the cap is Rs 50,000 and an income share of 10%, then if you’re earning Rs 4,00,000, you’ll pay me Rs 40,000, If you’re earning Rs 5,00,000, you’ll pay me Rs 50,000 and no matter if you earn Rs 6,00,000 or Rs 10,00,000 or Rs 20,00,000 you’ll only pay me Rs 50,000”
Nida is very happy with this upper cap which makes sure Mr.Musk gets back what he has invested and then some and also makes sure that she isn’t paying an exorbitant fee for the value he provided.
Mr. Musk is not finished though. He adds, “Let’s put in another clause. One month of a trial period. We test each other out. I see if you actually worth your salt and would work hard and utilise all the resources I provide and you can utilise what resources I’m providing and see if they’re worth the money you’ll be paying in the future. If either of us is unhappy with each other and doesn’t think that we’re a good fit, we don’t have to sign the contract.”
This makes lots of sense to Nida. She understands that they both should get to know if this’ll work as they will be working as partners on this endeavour. She happily agrees to sign the contract and to try out the next phase of her life. With her paying for her own education, rather than depending on someone else to.
As you can see, ISAs are a way to invest in people’s careers, based on their potential. Hope this has helped clear any doubts you’ve had regarding this concept in simple terms!
The value that someone adds to you in exchange for a share of your income is what varies from person to person. While Mr. Musk here pays for Nida’s college tuition, we at Nova Semita invest in final year students by helping them land lucrative jobs by training them in fields that are most relevant in today’s market alongside a like-minded student community.
We’re in this together. That’s how you know we care about your future.
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