Most people take the money now. But some bet on the future.
Like actors who accept a lower up-front salary in return for a share of the box-office gross. Like musicians who accept a lower advance in return for retaining the rights to their master recordings. Like Bill Gates when he kept the rights to his PC operating system; instead of taking guaranteed money up-front, he bet that future royalties would add up to a lot more.
And that's what American Basketball Association (ABA) owners Ozzie and Daniel Silna did in 1976 -- which turned their initial $1 million investment into approximately $800 million.
If you aren't familiar, the ABA was founded in 1967 as a rival league to the NBA. (My dad took me to see Dr. J. play for the Virginia Squires, which if nothing else tells you how old I am.)
By 1974 the league was in dire straits. A number of teams had folded. Others teetered on the verge of bankruptcy.
But where others saw disaster, the Silna brothers saw opportunity. So they bought the struggling Carolina Cougars and immediately moved the team to St. Louis, then the largest TV market without a pro basketball team.
Sure, they hoped to turn the franchise around. But they were also playing a longer game: They felt sure the NBA would eventually decide to stop competing for player talent and want to merge with the ABA.
And they hoped their franchise be one of those chosen to join the NBA.
Within two years, the Silnas turned out to be partly right. After the 1976 season the NBA did decide to merge with the ABA, agreeing to let four of the six remaining ABA franchises in: The Nuggets, Pacers, Spurs and New York (now Brooklyn) Nets.
Unfortunately that left the Silnas and the Kentucky Colonels, the other remaining franchise, on the outside looking in.
In order to complete the deal with the NBA, the ABA offered St. Louis and Kentucky $3 million each to fold their franchises. Colonels owner John Y. Brown haggled the ABA up to $3.3 million and then folded the team.
The Silnas turned the offer down. That created a major problem for the ABA; without a deal with St. Louis there would be no merger. The Silnas used fact as leverage to make an unusual counter-offer:
- They would receive payment for any of their players that were drafted by an NBA team (an amount which came to approximately $2.2 million), and
- They would receive 1/7th of the media rights of each of the four ABA teams that were joining the NBA (which works out to 57 percent of a full share.)
The ABA -- and NBA -- liked the the deal. For one thing, $2.2 million was far less than the $3 million originally offered. What's more, television rights were basically an after-thought. (Not until 1986 were all NBA playoff games broadcast live.)
And as for broader media rights... no one had the foresight to predict the Internet.
All of which may have caused the NBA to ignore a key point in the deal. The Silnas would own their share of media rights in perpetuity: As long as the NBA existed, they would keep getting paid.
Since the deal specified that no merger teams would receive TV money for the first three years, in 1979 the Silnas started getting checks of around $200,000 a year.
And then the NBA exploded in popularity. (Thanks Magic and Larry. And you too, Michael.) TV deals increased accordingly. By 2014, the Silnas had received a total of approximately $300 million.
Yep: Every year, the NBA wrote a big check to all the franchises for media rights... and had to write one for the Silnas, too.
Eventually the NBA got tired of cutting those checks, and did the math on what the future could hold, and in 2014 negotiated a one-time payment of approximately $500 million in return for the Silnas' media rights.
While that sounds like a lot of money -- and it is -- keep in mind the NBA's latest U.S. TV deal is worth $2.67 billion per year for 9 years. Then factor in rights deals for other countries. Digital streaming rights in China alone are worth $140 million per year for 5 years.
Add it all up and the Silnas look pretty smart: By turning down $3 million in guaranteed money, they eventually made about $800 million.
It's easy to look back and decide you had the right answers: How consumer tastes would change, how a market would shift, how an industry would be disrupted...
It's a lot harder to be right before things happen.
And to have the courage to make decisions based on what you believe. Especially if -- especially when -- other people think you're crazy.
Which is exactly what entrepreneurs do every day.