Paul Gu, one of the winners of Peter Thiel’s 20under20 fellowships, has co-founded a company called Upstart.  In this guest post, he explains his idea, pre-answers common questions, and solicits novel questions.  And now… Paul Gu!

Capital Contracts for Real

Friedman first proposed the idea of a human capital contract, a financial
instrument by which, in exchange for capital today, a person agrees to share a
percentage of his or her future income. His aim was to find a large-scale way
to finance higher education, without creating unbearable risk for students in
the form of high debt loads and interest rates. 

bachelor’s degree attainment has risen significantly since 1945, the broader
problem still exists: young people often have no access to capital; when they
do, it comes in the form of debt which significantly increases their level of
financial risk. 

founded Upstart to
solve this problem. Individuals raise money on Upstart for a fixed percent of
their future income. Upstart funds can be used for high-return investments in
an individual’s future like education or bootstrapping a startup, paying off
loans and increasing savings, or simply consumption smoothing. Unlike debt,
upstart payments are inherently affordable and flexible – if you earn less, you
owe less. 

an asset class, human capital has attractive properties for investors too.
Investors get access to the upside of an individual succeeding in their career
while facing limited downside. Unlike when investing in companies, especially
startups, there is no chance of striking out entirely – almost everyone will
earn income at some point in their careers. 

are a couple of the most common questions about Upstart. 

this indentured servitude?!

The essence of indentured servitude is the loss of freedom to make important
life choices. Upstart aims to do the very opposite. Unlike debt, which forces
people to follow certain career paths and lifestyles in order to make fixed
monthly payments, upstart payments are inherently flexible and easy. With
capital from Upstart and the non-distortionary income-based payments, upstarts
have a much greater ability to make the best choices for their life. And no,
investors do not get to decide what upstarts do! 

do you deal with the adverse selection problem?

selection would happen if individuals with high expected income were less
likely to participate than those with low expected incomes. To avoid this,
Upstart determines a funding rate ($ per %) for each applicant using a
statistical model that predicts his or her income based on academic and career
achievements. In other words, different income expectations are already baked
into the price of investing in each upstart’s future income. 

this for real? Is it legal? How do you enforce these contracts?

Upstart is backed by some of the top venture capitalists, including First Round
Capital, Khosla Ventures, KPCB, FoundersFund, Google Ventures, Eric Schmidt,
Marc Benioff, Mark Cuban, Scott Banister, Joe Liemandt and Andy Palmer. Former
US Senator and Governor Bob Kerrey is one of our advisors, and we have a very
thorough legal team. To enforce the income-sharing contracts, we reconcile each
upstart’s reported income annually via their US tax returns. 

would love to hear more questions from readers!