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In today’s tough economic climate, under- and unemployment is hitting the young especially hard. With college tuition rising yearly, it’s becoming more difficult to sit out the recession by going back to school.
This means many young people are spending their time working jobs that don’t allow them to use their most valuable skills, just to make ends meet; others cannot find jobs at all.
This not only hurts the young people themselves, but also the societies in which they reside. Aside from direct negative impacts like increased spending on benefits and a lack of taxable income, youth unemployment can also lead to social ills like a higher crime rate.
In short, keeping the young gainfully employed and out of debt is something to prioritize – and that’s exactly the mission of the New York-based startup Pave.
Pave acts as an intermediary between prospects – individuals looking for funding and mentorship – and backers who wish to invest in a young person’s future. Instead of asking backers to simply loan the cash to prospects, Pave requires the two parties to sign a “social-financial contract” which entitles the backer to a share of the prospect’s future earnings.
The idea for a company came to co-founder and CEO Sal Lahoud when a friend came to ask him for money to follow his passions. Instead of lending cash, Lahoud agreed to give his friend money and share in his future success (or failure).
Sensing that such agreements could help more individuals than just his friend, Lahoud recruited Oren Bass and Justin Mitchell, the respective COO and CTO, to co-found Pave with him. They launched the site in December 2012, hoping to help fund everything from loan payoffs to work-related projects.
Bass says the due diligence process around the legality of the social-financial contract was arduous. His research led him to the works of Milton Friedman and the human capital contract, and it took about a year before the team felt comfortable enough to move forward.
“In essence, the contract is very simple,” Bass told Crowdsourcing.org. “You get an amount of money up front to share in a percentage of future income for a certain time – that’s really what it is. There are no restrictions in terms of how you use that money… It leads to a full alignment of interests between the parties, and it can lead to some amazing things such as mentoring – if someone has a stake in your future, they’re massively incentivized to help you out.”
While it’s not a crowdfunding platform in the traditional sense, Pave’s model relies on and uses many of the mechanisms that make crowdfunding work. As Bass mentioned, there’s the alignment of interest between backers and prospects; as with crowdfunding, social media is key to spreading word about prospects; and since anyone can invest in an individual, Pave is open to the crowd.
For the time being, backers can contribute, at the very least, $500 to a prospect; the prospects currently featured on the site have raised between $3000 and $50,000. In return, they gave away from as little as .3 percent of future income, to 5 percent.
In the next several weeks, Pave will be launching a new feature called “Ripple.” Instead of limiting the donation amount to $500, the platform will let backers donate as little as they want to a prospect. These backers won’t be getting a financial return on their donation (after all, a one or two percent payout on $20 is negligible). The return, however, will be reinvested into other prospects on the platform – a sort of pay-it-forward system. Pave will also let organizations and individuals donate sums larger than $500 as Ripple money, if they wish to do so.
“It allows for this for a pool of money to be constantly cycled in the community, and, hopefully, over time, it will grow and grow,” Bass explained.
Unlike companies that attempted to fill the student lending gap in the past (like MyRichUncle), Pave combines a unique financial relationship that fosters mentorship with a social, peer-to-peer platform and limits its role to facilitating the connection between the backers and prospects. The company takes 3 percent of the initial investment, and then 1.5 percent of the payouts for its services.
For its December launch, Pave helped to create eight eclectic prospect-backer teams.
“This product isn’t for a certain sector of society or industry, it’s actually very useful to everyone from artists to lawyers, to tech engineers, to even doctors,” Bass said. “Anyone who really wants the flexibility to do something without the constraints of having to take on additional debt and is also looking to connect with people who can have an interest in a mentorship relationship with them [can benefit from Pave].”
The prospects who have gotten funding thus far bear this out. They include a jazz musician and a filmmaker, as well as an entrepreneur and an engineer. Each prospect has between four and six backers; some of them represent industries that the prospects want to end up in, while others are simply willing to mentor a young individual.
“The backers like the ability to actively influence the outcome of what they’re doing,” Bass said. “Whereas, when you put your money into a stock or a bond or an index, it just sits there, you obviously have no control.”
“We’re trying to foster a real peer-to-peer relationship,” Mitchell, Pave’s CTO, added. One prospect has offered to give away a percentage of future income just so he can make valuable connections, which, Mitchell believes, shows the strength and versatility of Pave’s model.
Looking into the future, the Pave team is focused on recruiting more backers as well as prospects and forming relationships with “mentorship-type networks” to increase visibility and expand its backer pool.
For more on Pave, check out the company’s site. We’ll be sure to keep up with the latest news coming from the Pave team and the success of their unique crowdfunding model.