Monday, 11 June 2012

Athletes as Owners

Over the last few weeks a number of high-profile athletes have announced their involvement with a bid for a sports franchise or their own apparel line: Phil Mickelson announced that he has joined a group bidding to purchase the San Diego Padres and Caroline Wozniacki announced her own underwear line in conjunction with a Danish company. On the other end of the athlete-ownership spectrum is Terrell Owens, whose contract and ownership stake with an Arena Football League team were recently terminated, reportedly as a result of his failure to attend certain team promotional events. There is nothing new about athletes having their own clothing line, or brand, or having an equity position in a venture but these developments with high-profile athletes highlight important issues.

First, it is increasingly common for athletes to not just simply be product endorsers for a fee but to obtain an equity position in the entity producing the product. Tom Brady (Under Armour) and David Wright (Vitamin Water) are additional examples of athletes taking equity in the company whose product they endorse. For the athlete, there is an advantage of having the potential to earn far greater financial rewards if the product becomes a financial success than through an endorsement fee. For the company, the advantage lies in tying the athlete to the company for the long-term and possibly paying the athlete less in cash by giving an equity position. This kind of deal can thus be particularly attractive for a new company with potential but not a lot of cash yet or a company that wants to make a splash through a celebrity association.

Second, giving an athlete an equity stake makes morals clauses, or a variant thereof, an important negotiating issue. The concept behind athlete endorsements is at least in part that their association with a product or brand will increase its visibility and financial success. If the athlete/owner subsequently is embroiled in scandal, the rationale for using him or her as an endorser may be reduced, if not eliminated, but what appends to their equity ownership? Is it retained? Forfeited? Subject to repurchase by the company at its option pursuant to a set price or formula?

A few years ago a client I was working with, a small company that sought to make a splash, considered giving equity ownership to a professional athlete. The deal ultimately didn't happen, fortunately, because just a few months later the athlete engaged in improper conduct and his marketing value had significantly diminished. The ramifications to the company for being tied to an athlete who had fallen into disrepute would have been severe. There is no doubt that athlete equity in their ventures will increase.

In order to protect the company providing the equity stake, care must be given to associating with an athlete who is unlikely to end up in a scandal. Drafting the endorsement/equity participation agreement should also be done so that the company is protected in the event the athlete falls into disrepute.

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