Yeah, it's a tradeoff. And you know what is good for examining tradeoffs? Math. I'm going to do some to help me decide whether or not I want to kick off my Upstart profile, and for how much. I developed my Upstart profile as a means to help fund the startup called SoundCheks. I hope that, by doing this analysis, I help other potential Upstarts decide how to make their own decisions.
Funny story. The first time I did this calculation, I made a serious error, which caused me to dramatically inflate the necessary income benefit for the Upstart to make any sense. The thing that makes it funny is that I sent a heartfelt email to Upstart that said I am likely going to wthdraw my profile. That's what happens when (a) you are naturally risk averse, (b) you did the calculations on the standing room only bus ride home, and (c) you did them while somewhat emotional that the funding rate you were awarded is lower than average (because you aren't a Princeton grad who scored high on his SAT). Thankfully, I caught the mistake, and that's why you're reading this right now.
The other reason why you're reading this is that this is big money we're talking here, at least to a (currently) broke graduate student who is married and has a three-almost-four-year-old daughter. So I'm not going to make decisions about it lightly. Hopefully, one day it will be chump change.
Here's how Upstart works. They allow you to raise R amount of dollars in exchange for 1% of your income over the next ten years. So if you request mR dollars (and you are funded at that level), you owe your backers (who are qualified investors, a lot of them in the tech field) m% of your income over the next decade. Most Upstarts, says the company's founder, should be able to raise between R = $6,000 and R = $8,000 dollars per 1% of income owed. You now what my funding rate is?
R = $4,750 per 1% income owed.
I was very disappointed. Upstart optimizes their funding rate based on your GPA, SAT scores, schools attended, and some other stuff. I don't know what the optimization algorithm is because, if I did, then I would just launch another Upstart-like company. Understandably, the algorithm is proprietary.
So I bet the reason why my funding rate is so low is because (a) I went to a third tier undergraduate teaching college, (b) I go to UW now, which is a great university, but it ain't Harvard!, and (c) I've never averaged much over 3.7 GPA. Who knows, maybe I'm not all that intelligent. Then again, I have been able to raise over $130k in scholarships and fellowships over the last six years, and that's not even counting tuition and medical insurance benefits. I'm also a Fulbright scholar. But you can only include so many variables in an optimization model, I guess.
Anyway, R = $4,750. That's what I've got.
What I want to do with this money is leverage it to start a company. That means I want as much of it as possible to help keep me and my family housed and fed for a year while I work my ass off (hopefully joined by an awesome team of employees at some point in the near future). That means I would probably want to ask for the maximum possible award, which is:
mR = $33,250, where m = 7
Therefore, I will owe m% = 7% of my income to my backers for ten years. Sounds like a lot. Furthermore, because I'll be paying my backers back for a decade, I might not want to worry about my student loan payments. So I might want to use this money to pay off a portion of my student loans.
Let's proceed.
Let p = m/100 = 7/100 = 0.07 be the proportion of my income that I am required to pay back to my backers if I do Upstart.
Let G be my ten year income if I do not do Upstart, assessed prior to my total student loan repayment over that period. Let's set G = 500,000. I think it is reasonable (if perhaps a little conservative) to assume I can make $50k/year on average over the decade following my graduation from UW.
Let d = 14,549 be my total student loan repayment over that ten year period, accounting for interest. Sad, I know (but better than many Americans have it!).
Let H = bG = b(500,000) be my ten year income if I do Upstart, assessed prior to my total Upstart loan repayment over that period.
Let f = 0.03 be the proportion of my award that I must pay as a fee to Upstart.
I want to solve for b*, the number of times greater my Upstart-influenced ten year income must be than my baseline income in order to justify taking the loan. Let's evaluate this with an inequality.
(1 - p)b*G - fmR > G - d
After some rearranging, we come up with a lower-bound for b*.
b* > 1/(1 - p) + (fmR - d)/(G(1 - p))
Plugging in p, f, m, R, and G and rounding to the nearest hundredth makes the threshold more concrete.
b* > 1.05
So in order to justify taking this loan and spending some of it to pay down my student loan, it needs to increase my ten year income by at least more than 5%.
Now let's take a look at what I have to work with in terms of adding value to..well..to myself with this Upstart money.
Let's say I get the full funding, $33,250. I have to discount that by the 3% fee to Upstart, which is $33,250(0.03) = $997.50. I also have to discount it by the principal balance of my loan, which is currently $11,304.40. Thankfully, loans are not taxed, so I don't have to lop off any taxes from the award. After all that, what am I left with?
$33,250 - $997.50 - $11,304.40 = $20,948.10
Let's be clear. That's not a high enough annual income for a husband and father in the Seattle area. Not if he wants to stay married, and not if he doesn't want to live off food stamps, and not if he doesn't want to burden his wife with being the primary bread winner. As an annual full-time income, I find that unacceptable. Furthermore, I would be out of the workforce for an entire year. This is just too much risk to accept for a married father. I cannot live in my mother's basement for a year eating Ramen at this point in my life, which is cool because I don't really want to do that.
But what if I could settle for doing the "idea" phase of the project part-time? What if I could raise another $10-$20k to supplement, plus some other funding to recruit a co-founder? And what if my savvy Upstart fundraising, plus the publicity it might help me get, could attract mentors and team members who could help me raise more funding and reach my goals?
I hope this analysis serves as a useful model to others making similar decisions. As it stands, I think this startup loan would be a net benefit to me and my family. I would really appreciate your comments, though. And remember...I need to convince not only myself, but my wife. And my wife is a no bullshit kind of lady.