Depending on the sport, athletes can generate substantial additional income as an athletic endorser, sometimes exceeding their contracts (Smith, 2019). Athletes have historically been used as a spokesperson, or endorser, for firms in the past hoping to capitalize on their appeal to their target market. In exchange for their endorsement, athletes would be compensated. Now, it is not unusual to hear that an athlete obtains an equity stake in company they endorse. If an athlete has an ownership stake in a business they partner with they have a vested interest in their performance and are more likely to actively promote the brand. As pointed out in a Sportico article, the use of equity for compensation can be expensive (John WallStreet, 2020).
The equity stake does not have to contain money up front, but as the brand grows and prospers, so does that stake. So, while the company may have cash now to reinvest in operations, or seek additional marketing strategies, the equity can be costly to the current owners over time. Moreover, any equity stake comes with an ownership vote in the future of the company. While perhaps not a threat now, it can pose a challenge if the athlete disagrees with ownership in the future and their is a public rift. Their is also additional risk to a brand in the activities of a sponsor may reflect back on a brand. It is not known how having an athlete owner will reflect on the company if their is a negative behavior attributed to the athlete.
For high profile athletes with a positive rating, the potential for income is apparent, as they stand to generate millions of additional dollars in income (Rascher, Eddy, & Hyun, 2017). These athletes have an interest in maintaining their popularity as it allows them to negotiate for higher endorsement fees. As this cost rises, companies may be averse to paying them cash, and so opt for some mix of equity in exchange for their endorsements.
As this landscape continues to evolve and athletes continue to look beyond their playing careers to build future financial portfolios, the use of equity to pay for endorsements will probably continue to grow. Brands will be faced with trying to determine not just how much an endorsement contract is worth, but how much a piece of the company is.
Rascher, D., Eddy, T., & Hyun, G. (2017). What drives endorsement earnings for superstar athletes? Journal of Applied Sport Management, 9(2).
Smith, N. (2019, June 17). 13 athletes who make more money endorsing products than playing sports. Business Insider. Retrieved from https://www.businessinsider.com/athletes-endorsements-nba-golf-tennis-2019-6
Sportico. (2020). Start-ups, challenger brands leaning on equity-for-endorsement deals, despite soft market. Retrieved from https://view.email.sportico.com/?qs=a7e127b8dd8af188e5ed7117fc6bda871e1beb8f88758bf397e3bd0afb2ba8298ab7d347dee925944f4afda5b010a214ca050ef5f7761b1f9a00793476f784ce570e6b08dabf65cf
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