The Vernon Davis IPO and Why Buying Stock in Athletes Is a Bad Idea

Standout 49ers tight end Vernon Davis is set to become the second NFL star to offer up a piece of his future earnings to investors willing to pony up cash to the athlete now. Fantex, the company that brought us the first-ever pro-athlete IPO last month with Arian Foster, announced last week that it inked a deal with Davis, a 2006 first-round draft pick.

If Fantex can find enough investors to cover its end of the deal, Davis will get $4 million up front in exchange for sharing 10% of his future sports-related earnings. Foster agreed to part with 20% of his earnings, but also would collect $10 million up front. We can expect more of these deals to come. Fantex says it is "actively pursuing additional brand contracts."

The idea of buying a piece of a star athlete's future might appeal to sports fans the way sinking money into a small biotech or technology company appeals to adventurous stock pickers. The risks are high, but so is the potential reward if things go right.

A closer look at the planned Davis IPO, however, has to leave you wondering if the potential reward is at all worth the risk. Let's take a look at who stands to benefit from this deal.

An athlete in his prime
Davis, 29, is a freakish athlete at the prime of his playing career. At 6-foot-3, 260 pounds -- linebacker size -- Davis can line up as a wide receiver, and an effective one at that.  He's averaging more receiving yards per game this year than any in the past, and he has a young star quarterback in Colin Kaepernick to deliver him the ball.

All looks well on that front.

But this is likely Davis' peak earnings year as a player. He makes a 2013 salary of $6.072 million. Next year, that dips to $4.7 million. In 2015, his last year under contract with San Francisco, Davis is set to earn $4.35 million.

He'll hit free agency in 2016 at the age of 32. That's two years older than the age at which the average NFL player retires.

For Davis, the Fantex deal offers a reasonably cheap insurance policy. Unlike Major League Baseball, where contracts are guaranteed, NFL teams can end contracts at any time and not owe a player another dime from that moment forward.

For Davis to lose, he'd have to earn more than $40 million in sports-related income over the rest of his life. While that's possible, it seems highly unlikely.

Super-athletic tight end Shannon Sharpe had a long, successful NFL career. The Hall of Famer played 14 seasons, and in only one of those did he miss significant time for injuries. What's more, he signed a four-year, $14 million contract at age 32.

But a closer look shows Sharpe peaked in 1997, eight years into his career. At the time, he was 29, the same age Davis is today.

Sharpe never did collect all the money due in that four-year contract. He was cut by the Baltimore Ravens midway through. When he resigned with the Broncos in 2002, it was for just $750,000 a year, and he retired two years later.

What about other earnings?
Davis has endorsement deals with Force Factor dietary supplements and Krave beef jerky. Those aren't exactly Aaron Rodgers Discount Double-Check endorsements. That raises the question as to whether Davis has much appeal as a product spokesman outside of his home market.

Davis has been smart outside the game. He founded and co-owns a company that provides interior design and landscape architecture for businesses and well-to-do homeowners, and also owns a chain of Jamba Juice franchises. But his business endeavors outside of sports would be off-limits.

His potential post-career earnings are anyone's guess. There are athletes who go on to long and lucrative careers in sports broadcasting. Davis is reflective and articulate in interviews, but reflective and articulate is not what usually plays well in the broadcast booth or the studio. Michael Irvin, Deion Sanders, Sharpe, and Terry Bradshaw aren't exactly reflective, thoughtful TV personalities.

Then there's this
If a short playing career and limited post-football earnings opportunities didn't present enough risk, there's also the unusual mechanism into which investors in these IPOs will sink their money.

Investors don't actually buy a share of the athlete's earnings. They buy a stock designed to track those earnings. And here's the trickier part: That tracking stock can be converted by the company into Fantex platform common stock at any time. Here it is in the SEC filing:

... the board of directors may convert Fantex Series Arian Foster into platform common stock where the Fantex Series Arian Foster is no longer an actively traded stock, as determined in good faith by our board of directors or a committee of the board of directors...

So, are investors really buying stock in the brand of their chosen athlete, or are they investing in an experimental, and so-far unprofitable sports marketing business?

That's apparently for Fantex to decide, and without your say. Most people would be best-served by keeping their distance from such complex investments. As Fool writer Eric Bleeker pointed out in an article on the Foster deal, Fantex may be a start-up, but it's not an amateur shop.

The Foolish bottom line
Fans looking to buy a piece of a star athlete will be better served by buying sports memorabilia, tangible goods with a known market. And no one's going to swap out your autographed Vernon Davis game jersey for a few shares of Foot Locker.

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