The _only_ way this idea meets my standards is if the loan is invested in a corporate entity which enables the recipient to fail and walk away from the debt (and assets, of course).
Let me state this as clearly as possible for anyone that thinks this is a good idea: "excessive usury" is pure evil. Being able to walk away from failure and start again is the secret sauce that makes the American economy the envy of the world.
Part of my motivation to get an investor was precisely to offload that financial risk to someone else. I'm already putting in at least 2 years of my life, including a lot of blood and sweat. If I fail then the last thing I'd want is to spend another X years getting rid of that debt...
Also I'm truly baffled at your statement of:
even an entrepreneur who has failed to get rich by the end of the four year can resort to taking a job at a big company. One year of that will pay off most of the loan, and will allow him to take a separate loan from the bank to cover the rest.
Excuse me?
After the 4th year I'd owe you roughly $120000. Most of us mere mortals would probably need closer to 7-8 years to pay that back.
This idea comes up from time to time and someday might catch on. Here's some recent discussion:
http://www.american.com/archive/2008/june-06-08/popping-the-...
http://blog.gocollege.com/2008/11/30/paying-for-college-radi...
...and the company mentioned in the second piece...
No idea if they're legit.
http://en.wikipedia.org/wiki/Bowie_Bonds
There was also a minor league player that was selling shares in himself (although I think he did so in blatant violation of the '33 Act).
If I had to choose between having debt, and working side jobs like I do now, I would choose the debt. I understand that you would have chosen the side job. I guess the question is, are there enough people who would have chosen the debt?
As for why I would choose the debt: I know at >99% that I could pay it. Therefore it will hardly distress me. Even if my life would turn out to be a total failure I could still get some coding job at a big company, take a separate loan from the bank, and pay it all off in a few years. It would suck, but for a worst case scenario it's not that bad.
That's the problem I see with this idea: as soon as you start taking debt instead of equity, your competition changes. And there're lots of people already willing to give you money at 20% interest, even if your qualifications aren't stellar. Besides credit cards, you could just go to Prosper.com.
BTW, I'd be far, far more worried about taking on $100k of debt than you seem to be. Companies fail for all sorts of reasons, and while I won't exactly say that they're beyond the control of founders (mine failed do to my own stupidity), they are often beyond the ability of founders to predict when they begin their venture. And while I was lucky enough to get a job at Google afterwards, it's important to point out that the first few firms to offer me jobs weren't all that great, and it was only because I had cash in the bank that I could afford to wait them out until BigCo Coding Job came through.
If people aren't willing to give you cash for equity, it's probably a bad idea for a company and you should switch projects. (It's unlikely that you're the one in 100,000 entrepreneur who has a brilliant idea others just can't see the brilliance of.) Otherwise I don't think there's much of a good argument for turning down equity financing for a high-risk venture.
It just makes a lot of sense economically: your biggest asset as a poor entrepreneur is your time and effort, and you need some capital to make your project happen. Investors have a lot of capital, but only a finite amount of time/effort to do things with it. So it's a fair trade: you put in time/effort, and the investor puts in money. If you just finance everything with debt, you end up having to incur both downsides of losing time and money -- and the downside of losing $100k in capital is a lot worse for you than for the rich investor. If the project fails, you'll have to spend time/effort to repay the $100k instead of just moving on to the next project.
I agree that if the entrepreneur actually starts a start-up proper, he would do best by financing it using equity. But most entrepreneurish activity is not a start-up proper - Just little things you try and that sometimes evolve into big projects. It's hard to sell equity out of those.