Saturday, August 05, 2006

MBA financing through equity instead of debt!

If you're one of those not excited about finishing the MBA programme with $100,000 of debt, there is an alternative way to finance your MBA, or any form of tuition fees for that matter. Why not use (private) equity? A guy named Lars Stein from the Swiss elite university St. Gallen has done just this and has been hugely successful in raising money. There are plenty of articles on him in the German speaking press, but I haven't found any in the anglophone press, so I'll explain what he did.

He was about to initiate his studies of business administration and didn't want to take on debt. So he decided to go public and created shares in his future income. He created a share that would, for example, cost $1,000 per unit, and would give the holder the right to 0,5% of his annual income over the first 5 years of his professional life. With an expected annual income of $80,000 over the five years, the holder of the share could get back $2,000 (I am ignoring the time value of money here for illustration purposes, I'm sure he devised it in a more savvy and complicated way). In this example, you could for example raise $30,000 by selling 30 shares, and would then have to use 15% of your annual income over the first five years of your career to pay back your shareholders, i.e. to buy back your shares.

Obvious questions/concerns that could come up...

How do I convince investors?

You need to show that you are likely to receive a minimum income of $x upon graduation. The easiest way to do this is to show your achievements to date and refer investors, for example, to the LBS employment report quoting average starting salaries for MBA students :-).

Is equity going to be cheaper than debt?
As in real life, debt is can be used as a tax shield and is usually much lower effectively than what it looks like (I don't know what the regulations are in the UK but I assume interest expense can be written off?). Interestingly enough, equity will be much more expensive the more you earn - so if you think you are likely to secure that KKR job, your shareholders will benefit tremendously while you might get upset about your financing decision. On the other hand, if you decide to take that fundraising job for an NGO in Africa, your equity will turn out to be much cheaper than debt - but with those plans, who is likely to buy your shares?

So overall, a boring bank loan might not be such a bad alternative. But keep in mind that interest rates are rising and predicted to continue rising, so private equity might turn out to be a good financing alternative for your MBA after all...

4 comments:

yir said...

Interested to know whether he has sold any shares at all? I guess the other option is fund raising among family and friends, assuming you have rich family or friends, would this be called venture capital, partnership or what :-)

Anonymous said...

If you want to know more about my idea and how I realized it, please ask me personally. You find more information in German on http://www.studienaktie.org. There you will also find a contact adress.
Best, Lars Stein

N said...

I just came across your blog. love your posts. very innovative.

Jayavant said...

I like your way of thinking & approching others in your work.your blog maintenance& other posting are really nice.