In the entertainment world, celebrities and professional athletes no longer seek only money as compensation for their product and service endorsements. Instead, many are looking to secure hybrid ‘sweat equity deals’ that offer a combination of cash and equity ownership and/or revenue participation in connection with the products, service companies, and corporate brands they are endorsing. Although this is a growing trend, celebrity and pro-athlete talent agencies are finding it challenging to keep up with the knowledge, time, effort, and special financial requirements involved with these hybrid sweat equity arrangements.
Brand Endorsement Sweat Equity Deals: What Are They?
A brand endorsement sweat equity deal is a type of financial arrangement where celebrities and high-profile professional athletes are given ownership equity and/or revenue participation in exchange for their endorsement and other involvement in brand building or a business venture. These types of sweat equity arrangements have become an increasingly popular business model in recent years, with celebrities and pro athletes like NBA superstar LeBron James taking advantage of them. Here are just a few instances of how pro athletes and celebrities have profited from these deals:
LeBron James Cashes in with Beats by Dre
In 2008, LeBron James began a brand endorsement deal with Beats by Dre that included more than just traditional endorsement money—as part of the agreement, James was given shares in the company for his contributions to marketing and brand awareness, or in other words for wearing the Beats headphones in public. Six years later, in 2014, when Apple acquired Beats for $3 billion, James cashed out those shares and netted approximately $30 million.
Beyonce Reaps Benefits from Uber Equity Deal
Brand endorsement sweat equity arrangements have also opened doors for entrepreneurs and business owners who don’t necessarily have access to surplus capital but otherwise possess unique skill sets or technological know-how that could help their businesses grow and eventually become highly successful. Beyonce followed James’ lead in a deal with Uber which saw her become the company’s first celebrity backer. The multi-Grammy Award-winning artist and entrepreneur agreed to accept stock for her creative input and media influence within the ride-hailing app. Under the terms of the agreement, Beyonce agreed to contribute her knowledge from years of experience in the music industry to help shape Uber’s future success and to leverage her preeminent social media presence to promote Uber across various media platforms.
Stephen Curry Scores Again with Under Armour
Golden State Warriors NBA superstar and Under Armour ambassador Stephen Curry has recently been granted $75 million worth of Under Armour common stock. The stock grant was only one component of the renewal of Curry’s pre-existing ten-year ‘brand ambassador’ endorsement deal. The grant is expected to vest over several years and will be subject to certain performance-based conditions. Curry has been associated with Under Armour since 2013, and his signature basketball shoe line has been a significant success for the brand. Curry’s involvement with Under Armour is seen as a major asset to the brand, as he has a significant following among basketball fans worldwide and is known for his style both on and off the court.
Although celebrity and pro athlete brand endorsement deals are not new, in the past, the talent involved was typically paid in cash upfront. Given the exponential growth of social media and the enormous increases in the number of social media followers gained by celebrities and high-profile pro athletes, they are prioritizing equity ownership and/or revenue participation over upfront cash payments as they now recognize the substantial added value they are bringing by becoming the public face of a brand.
Tsunami Wave of Brand Endorsement Sweat Equity Deals Challenges Talent Agencies
As the entertainment industry evolves, talent agencies are forced to adapt their business models. Talent agencies have traditionally relied on receiving their percentage share of cash payments made to their clients when the agents secure gigs, merchandising, and brand endorsement deals, but now many agencies need significantly more resources to manage the onslaught of brand endorsement sweat equity deals they are receiving on behalf of their clients.
And instead of receiving a portion of a certain upfront cash payment amount, brand endorsement sweat equity deals involve agencies taking a portion of the potential future revenues and/or profits in payment for their agency services. This type of ‘back-end loaded’ transaction structure is becoming increasingly popular among independent artists and smaller startup companies that lack the funds to pay market rate upfront cash payments. While the brands, celebrities, and pro athletes are all under pressure to make these arrangements successful, the sheer volume of pitch decks that startups and other lesser-known brands send out for review is typically too much for established talent agencies to handle.
While such arrangements have many advantages for celebrities and professional athletes, substantial risks are involved for the participating talent agencies. For example, most startups fail, so taking an equity ownership stake and/or profit participation may result in receiving nothing in return for several years or more, if at all for the agencies, which translates into no currently contemplated incoming cash revenues available from those deals that would otherwise contribute toward the payment of talent agency overhead costs and operating expenses. These deals also necessitate expertise, careful research, due diligence, time, and effort that many agencies may not have the ability or the inclination to provide themselves. Agencies must be diligent when reviewing the terms of any type of sweat equity deal on behalf of their clients. This includes substantial research and investigation on the individuals’ backgrounds and verifying their capabilities, track record, and other business credentials. Additionally, they should ensure that all legal documents are professionally prepared to protect their clients and themselves from potential downside risks and liabilities. Moreover, talent agencies must invest significant time and effort in negotiating fair terms and building trust with the other parties in the deals.
Lastly, talent agencies need to understand that the transactional pursuit costs and expenses that are involved with exploring and prosecuting brand endorsement sweat equity deals for their clients can quickly add up, including business consultants and attorneys’ fees, and tax advice in connection with structuring the deals to maximize the benefits for their clients.
Easing Pressure on Talent Agency Deal Vetting
Where does that leave the celebrities and high-profile pro athletes that hundreds of startups and smaller brands are courting with brand endorsement sweat equity deal offers? Both celebrities and professional athletes should strongly consider hiring their own personal business manager and/or attorney experienced in brand endorsement transactions to assist with the talent agency’s deal vetting and negotiation process. Celebrities and pro athletes should also be mindful that sweat equity brand endorsement deals and their corresponding media content and personal appearance commitments (especially if the brand endorsement deal is exclusive) represent a conflict with the talent agency’s best interest in generating revenue toward paying their current overhead costs and expenses. Finally, properly structured brand endorsement sweat equity and/or profit participation deals require careful attention to detail and knowledge of the various potential pitfalls inherently involved. An experienced entertainment attorney who understands the nuances of the celebrity and pro-athlete brand endorsement process can work toward ensuring that all participants are taking on fair roles and responsibilities in light of their respective commitments and contributions, tailoring the anticipated revenue waterfalls and the returns each participant will receive, as well as memorializing any further obligations or liabilities that may arise from entering into these types of agreements.
