NEW YORK ( TheStreet) -- Fantex releases its first player IPO. Vernon Davis, the freakishly athletic tight end for the 49ers, is the first to do so. Here's how this works: Vernon Davis agrees to give Fantex investors 10% of future earnings and he receives $4 million right now. Fantex released $4.21 million worth of shares. So, not only have they already covered their cost to Davis, but they immediately pocketed $211,000 on this "IPO."
I spoke with one of their guys several months ago. I have to say, it is a great idea, but the problem is that they don't understand the industry well enough. Unless they could get each and every investor to sign an iron clad pre-nup this is fraught with terrible possibilities. If you are an active investor, you have probably seen numerous letters in the mail on behalf of other investors or a law firm that are suing a particular company. Just this year, I've received 20 plus. People sue companies all day, every day.
Essentially, Vernon Davis has just put himself up as a publicly traded company. Any misstep or misfortune has the possibility of litigation. Let's say Vernon made a bad decision to drink and drive, or let himself go a little in the offseason and gained 20 lbs. What's to stop the investors in this from pursuing litigation? I assure you, there are a million reasons for people to sue these days, valid or not.
Now remember that this is not an opinion on whether or not people should be able to sue him, just that it opens the door. Also remember that the $4 million is not free and clear. You can immediately take 10% off of that total for his agent/publicist that brought this idea to him. Then you can take 40% off the $3.6 million for taxes. He is now making this gamble for $2.16 million dollars. Remember, he has now promised 10% of all future earnings. Anything he makes above $20 million for the rest of his life is now a loss. He will have paid Fantex for the right to be taking all this risk.
Vernon Davis will be an unrestricted free agent in 2016. He will be 32 years old. Unlike many positions, there is a good chance he will be getting another nice contract if he maintains output. He is due over $9 million in the next two years. Basically, that means if he continues to play after this contract is up, he can only make $11 million before he is paying the investors and Fantex for the luxury of upfront money. This doesn't even include anything after his playing days are over. Should he get any kind of marketing deal between here and there? Well you get the point. This is a short-sided view with untold risk.
Now let's get to the Fantex investors. This is going to be an extremely illiquid market for most athletes. It is something similar to trading penny-stocks. As of the moment this piece was being written, only 101 shares have been traded on this IPO. Sure, this will get more exposure and might change in the future, but you understand the premise. Also, what's to stop Fantex from issuing more shares and flooding the market. When they were planning on doing an Arian Foster IPO last year, they mentioned offering 1 million shares. Who sets this liquidity?
I mention Foster because he was slated to be their first IPO, but had a major injury. Had this happened after the IPO, his stock would have plummeted. Freak injuries are part of the game and far too risky to be invested in.
Bottom line is that there is no good reason to be an athlete agreeing to this, nor an investor. If you look at it like trading cards that will probably be worthless someday, you might have fun. Other than that, invest in real companies.
At the time of publication the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.