Last week, my blog post regarding equity for endorsements focused on the benefits and disadvantages of the athlete/celebrity endorser. This post will focus on the companies, and why they should or shouldn't offer equity for endorsements.
Startups have long sought celebrity endorsements under the misguided notion that the endorsement will equate to the company's success by harnessing the celebrity's star power. In fact, there are many articles on how to attract celebrity endorsers (See here and here) Not surprisingly, offering equity for endorsements is a common suggestion on these "How To" articles. But, companies should be mindful of how they distribute their equity, as a celebrity endorsement does not always work out well for the company (see here).
In sum, all of the benefits of getting endorsements for equity necessitate sales increases and discount the loss of equity.
Celebrity endorsements of products and companies have long been commonplace. However, where these celebrities were once paid with money, many are instead accepting equity. This is particularly true when it comes to celebrities endorsing start-ups and their products.
Last week, The New York Times ran an article which stated that equity for endorsement agreements are gaining in favor with celebrities due to the recent explosion of the start-up scene, especially in California, and the deal's ability to create substantial income should the company become successful. This is especially true for professional athletes.
Professional athletes have particularly taken to equity for endorsement agreements. This is likely due to the potential of receiving a windfall and the players' understanding that athletic careers can be lost at any time. In recent years, several athletes have made headlines by entering into equity agreements. One of the most notable equity for endorsement agreements was David Wright's acquisition of .5% of Glaceau, the creator of Vitamin Water. When Glaceau was bought in 2007 by Coca Cola for $4.1 Billion, Wright's .5% was worth an estimated $20 Million. In 2010, Tom Brady entered into an equity deal with Under Armour, a now ubiquitous athletic apparel company. Most recently, in June, 2014, Richard Sherman entered into an equity for endorsement agreement with BODYARMOR SuperDrink.
However, accepting equity for endorsements has significant benefits and disadvantages for the endorsing athlete.
Although athletes and celebrities may be agreeable to equity for endorsements due to the low risk/high reward potential, companies do not freely offer such opportunity. Many companies are protective of their equity, and within good reason. My next post will discuss the benefits and disadvantages of equity agreements to companies, who bear a much bigger risk when offering equity for endorsements.
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