In both cases, the idea is as follows: raise money from backers in exchange for a percentage of your future earnings. The idea here is that individuals, whether they are starting a company or restructuring their finances in some other way, can benefit from some amount of capital to take income pressure off of them for some period of time. That might give someone the opportunity to explore a product or company idea, or might give them the opportunity to do some other kind of life change (moving, having a child, etc.).
At USV, we were discussing this whole phenomenon a few months ago, and the general feeling in the room was that it felt a little icky to invest in individuals this way. Like indentured servitude. And that it runs the risk of striking a bad deal for those taking the cash, that they’ll resent later on.
I understand that perspective, but I think the view on this changes a lot if, rather than as an alternative to traditional equity investing / fundraising, you look at it as an alternative to debt. From that perspective, I think it starts to look a lot friendlier to the entrepreneurs / individuals.
I know from personal experience how it feels to have debt hanging over you. It’s a bad feeling (not to mention a source of chronic stress and illness), and something to be avoided if you can do it. And mismanaging debt from commercial banks is another reason why it’s expensive to be poor. But for many folks, it’s the only choice.
Personal equity, on the other hand, creates a different alignment between the investors and individuals. Everyone is bought into the individuals’ success. This is the same dynamic that makes traditional equity investing work so well.
I’m a firm believer that we are just scratching the surface when it comes using the internet to empower individuals in new ways. In finance, we’re seeing that everywhere — for individuals, in the debt (LendingClub, Prosper) and philanthropy (Kickstarter, Indiegogo) spaces, and for companies in equity (AngelList, CircleUp) and debt (Funding Circle, C2FO). Personal equity is a natural extension of that, and seems worthy of exploring.