Fantex Selling Stock in Andrew Heaney’s Future Earnings

Fans of Major League Baseball have long held an emotional investment in favorite players and teams, spending time and money on the sport and receiving widely varying emotional returns depending on results. If Fantex and Los Angeles Angels starter Andrew Heaney get their way, fans and investors will soon be able to invest in the future earnings of the Angels left-hander. Heaney and Fantex, a company that has previously struck similar deals with multiple NFL players, have agreed to a contract that will pay Heaney $3.34 million in exchange for “10 percent of all future earnings related to his brand, including player contracts, corporate endorsements and appearance fees,” according to Ken Rosenthal. A deal like this will attempt to provide pre-arbitration players like Heaney a form of insurance against future injury or a downgrade in performance without signing a team-friendly contract that keeps players from free agency. While this concept has been around for quite some time, in practice, these deals are still in their infancy and come with some drawbacks.

Almost two years ago, Fantex made news by announcing an agreement with star running back Arian Foster of the Houston Texans. The deal, similar to the one for Heaney, would have paid Foster $10 million in exchange for 20% of Foster’s future earnings. Before the parties could follow through on the deal, Foster was injured and the IPO never got off the ground. The deals with Fantex are subject to getting enough investors to pay for the initial guarantee to the players. For Heaney to get paid, enough investors must first meet the IPO amount, in this case $3.34 million.

In some ways, this model may look like a long-term version of daily fantasy games, where fans can put forth a relatively small sum of money in the hopes that a player will play well and provide a return on the money they have deposited. I spoke with Fantex co-founder and CEO Buck French about the potential comparisons and he was quick to refute them, stating that they do not consider themselves in the same market. “[Daily fantasy sports] is totally different. It’s not investing. Either you win or you lose… A single game outcome will determine whether you win or lose.” French cited a Wall Street Journal article stating that 1.3% of daily fantasy players win 91% of the profits in the first half of the MLB season. French said that, in Fantex, people “invest in future cash flow stream and collect dividends. They aren’t trying to beat out a whole bunch of people.”

Unlike daily fantasy games, Fantex is regulated by the SEC as is the exchange on which the players’ brands are traded. Whether fans are interested in a deal where any potential large return is far into the future and minimal in the short is not yet clear. French indicated that a majority of the investors in Fantex have not been made by fans, but instead by investors who appreciate that what happens in China has “no effect on Vernon Davis getting paid.”

After Arian Foster’s deal was announced, Wendy Thurm discussed the past attempts to start similar ventures to Fantex, which proved to be quite difficult to pull off. A problem for investors is the investment made is not directly to the player.

Writes Thurm:

The value of your trading stock isn’t specifically tied to Foster’s success or his future earnings. It’s tied only to Fantex’s success and the vagaries of its new private exchange. Foster’s success on and off the field may bear on Fantex’s success, or it may not.

French believes that Fantex is different from past ventures as “other than Randy Newson (who tried a similar project as a minor leaguer and is currently the Vice President of Business Development for Baseball at Fantex), it was never truly tied to the cash flow of the athlete. Today, we’ve collected $1.4 million and paid out $664,000.” French believes this “underlying linkage” has allowed Fantex to succeed.

Some of the uncertainties present in 2013 have been alleviated — and have led some, like Daniel Roberts of Fortune magazine, to declare that Fantex is “working.” Fantex launched in April 2014 with Vernon Davis of the San Francisco 49ers as their first player. Fantex currently has seven NFL players available for investment, with prices ranging from $7 for E.J. Manuel to $13 for Mohamed Sanu, reflective of both player performance as well as the initial investment amount. Fantex says their plan is to put 95% of the earnings they receive into dividends that are then paid to investors. They plan to pay dividends quarterly, and have paid out more than half a million dollars, but, not surprising given the small number of offerings at this point, the dividends have not been consistent in those payments thus far.

French, who could not discuss Heaney or the MLB due to SEC regulations that prevent comments on public offerings without an S-1 statement on file, said they pitched NFL players by letting them know they were “interested in investing in you, helping you realize your full potential.” French indicated that the vast majority of feedback from NFL player agents has been supportive. Interestingly, Fantex did not seek approval from or work with the NFL in making their deals, focusing efforts with the players. French believed Fantex could “potentially help provide some level of financial stability to the players.”

For Heaney, it is easy to see how he could benefit from this type of arrangement. In baseball, players are paid the minimum salary of roughly $500,000 for nearly four years before hitting arbitration, at which point they not infrequently achieve their first seven-figure payday — albeit still three years from free agency. For years, teams have used this process to their advantage, signing players to team-friendly deals before the players reach arbitration, getting more prime playing years at a reduced cost and delaying free agency.

When approached by teams with a guarantee in the tens of millions, players generally choose to make themselves financially secure for life as opposed to risking injury on a $500,000 salary. They have few alternatives to obtain anywhere near that type of security. Insurance policies are expensive and might require that the player be physically unable to play ever again, essentially forcing retirement. The model that Fantex uses potentially provides a player security, perhaps not to the level that a contract extension would provide, but enough that he could comfortably turn down a team-friendly extension and hit free agency at the youngest possible age. For those players who are good enough to sustain a major league career, but have not been identified by their clubs as a candidate for extension, this model also provides them with security that they would be unable to otherwise find.

Heaney is ideally situated to take advantage of this opportunity. The sabermetrically inclined 24-year-old left-hander debuted for the Marlins in 2014, but accrued just 47 days of service time before his trade to the Los Angeles Dodgers and then (shortly thereafter) Los Angeles Angels. He was kept in the minor leagues this season until near the end of June, meaning that at the end of this season, he will still be short of one full year of service time. He is likely to be eligible for Super-Two arbitration until 2018 and will not be eligible for free agency until after the 2021 season, when he will be 30 years old. Any extension further delaying his free agency could significantly impact his potential for future earnings.

Heaney’s deal is the first one in Major League Baseball for Fantex, and it remains to be seen whether others will follow. Over the winter, and especially into spring, is a prime time sign young players to contract extensions. Players could find offers from their teams either not to their liking or non-existent, and Fantex could provide these players an alternative to negotiating with their own team, or could otherwise provide a bit of leverage to extract more money in negotiations. According to Rosenthal, both the MLB and MLBPA had their concerns alleviated and approved this arrangement. That means, assuming no changes in the Collective Bargaining Agreement, the onus is on Fantex to convince players that the arrangement is beneficial, and to convince fans and investors that the company has the type of staying power and resources to make this unique venture worthwhile. Fantex has jumped a lot of hurdles over the past few years to get where they are now, but to turn themselves into a sustainable enterprise, they will need continued growth in the years ahead.