An interesting article over at Baseball Prospectus this morning introduced me to a company called Fantex. Fantex enters into agreements with people to pay them up-front in return for a portion of their future earnings.
On April 27th, along with nine other professional athletes, Fantex announced that it has entered into such an agreement with Astros starting pitcher Collin McHugh.
As reported, McHugh's deal will pay him $3.96 million right now, contingent on Fantex being able to raise that money by selling stock against 10% of McHugh's future earnings on and off the field.
Under the terms of each of the newly announced brand contracts, Fantex, Inc. would acquire – upon payment of the upfront purchase price – an interest in the future on- and off-field cash flows of the athlete, as defined in the applicable brand contract. The consummation of each of the brand contracts is contingent upon Fantex, Inc. obtaining financing necessary to pay the applicable purchase price.
As I understand it, Fantex sells "stock" against 10% of Collin McHugh's future earnings. He agrees to give up 10% of his future earnings in return for $3.96 million right now, paid for by the investors that buy that stock through Fantex . McHugh gets "set for life" money right away, which disincentives him from taking a below-market deal buying out his arbitration and a couple Free Agent years.
Under MLB's current collective bargaining agreement, players early in their career are tacitly incentivized to accept contract extensions that would be below the market rate if they were unrestricted free agents. They do this because, although the $500,000 MLB minimum contract is good money for those of us who toil at jobs that are less influenced by supply and demand (there are a lot more people qualified to collect trash than play MLB-level baseball), that minimum salary is not "set for life" money for professional athletes.
This deal earns McHugh eight times his current salary immediately, plus his actual MLB salary, any endorsements, minus ten percent on those earnings, over the course of the rest of his career. No matter what happens, even if his arm falls off tomorrow and he makes $0 dollars, McHugh is already a multimillionaire, and presumably can live comfortably in suburbia and send his grandkids to a good college.
The obvious flip side is that McHugh could be turning over 10% of his earnings to investors if he makes it big, which he is on pace to do. As a 3.5-WAR player over the past few seasons, he could be worth as much as $20 million per season to the right buyer in free agency.
However, in negotiating that $20M/Season contract, he could offset the lost cost by pushing for another approximately $2 million/season, and some MLB team would probably pay it. And if not, earning "only" $18M/season really doesn't make that much difference in terms of lifestyle.
It's a no-lose situation from the player's perspective. If McHugh busts, he earns $4M, plus whatever salary he makes as a MLB player, minus 10%, which could be a trivial number compared to that $4M. If he's even mildly successful, he stands to earn more by taking an at-market deal minus 10%, plus $4M than he would if he took a below-market deal earlier in his career, for financial security.
For MLB clubs, this is a clear shot at their ability to sign players to team-friendly extensions, such as the four-year, $12.5 million (total) one Jose Altuve signed prior to 2014. With an additional $4 million in the bank, McHugh has no strong reason to accept a below-market extension from theAstros. He is financially secure enough now (for the lifestyle of a jet-setting major league baseball player) that he can patiently wait through arbitration until he reaches Free Agency.
Even if McHugh backslides into a back-of-rotation pitcher, plays out his arbitration years, and is out of baseball, he still stands to earn more under this deal than he would otherwise.