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). 

Benefits

• Does not require available cash- Many startups are strapped for cash during their first few years, and few can afford the high prices of celebrity endorsements for money. Offering equity for celebrity endorsements may be the only way the company can secure such an endorsement. 
• Potential synergy- A well selected celebrity endorsement will create a synergy between the company and/or its products with the celebrity, allowing the endorsement to come across naturally and potentially harness the endorser's fan base. This could lead to greater sales figures.
• Perceived credibility- Let's face it. Customers are more likely to attribute credibility to a company that is endorsed by a celebrity they "trust." 

In sum, all of the benefits of getting endorsements for equity necessitate sales increases and discount the loss of equity.

Disadvantages

• Being tied to the celebrity- Giving equity for celebrity endorsements, and the extensive marketing campaign required to utilize the celebrity endorsement, ties the company to the celebrity for better or worse. Should the celebrity become embroiled in a scandal, or engage in some manner which hurts their image, the company could also be damaged through its association with the endorser (unless the endorsement agreement contains a well-drafted morals clause). 
• Divestiture- Equity for endorsement deals are investments to the celebrities, which can eventually be cashed in. Granted, a well drafted endorsement for equity agreement will have provisions as to how and when the endorser can divest their equity, the sale of the stock can occur at a bad time for the business, ultimately damaging it.
• Less equity can be used for other purposes- By offering equity for endorsements, the company is limiting the amount of equity it can distribute to other channels, which may be more beneficial. For instance, companies can offer equity to woo experienced employees or for venture capital funding. Granted, both of those equity offers have their own benefits and disadvantages, each company is unique, and may be better served by using the equity they would exchange for celebrity endorsements in a different manner. 
• Risk- Although some companies have found success with celebrity endorsements, not all celebrity endorsements result in a financial boon for the company. Further, should the celebrity breach their endorsement agreement in some way, the litigation costs could quickly mount for a cash-strapped startup. 

Equity should be carefully guarded by a company, especially a startup, because there is a limited amount to distribute. Some founders may wish to distribute as little equity as possible, and/or retain a greater amount of equity for themselves. Before agreeing to anything for equity, especially endorsements, the proposed agreement should be carefully vetted to determine if it fits with the company's plan moving forward. 

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. 

Benefits

• Wealth building- Athletes have short playing careers and therefore have a short period of time to maximize their profits by capitalizing on their on-field success. Equity for endorsement agreements while the athlete is still playing can provide substantial income even after the athlete's playing days have ended. 
• Favorable tax treatment- Standard endorsement agreements for cash are taxed as income. However, equity for endorsement agreements are taxed as capital gains, which is generally a much lower rate than income tax, when the endorser sells the stock. 
• Potential windfall- As with David Wright, there is always the potential that the equity for endorsement agreement could result in an extremely large payday for the endorser. Of course, there are many factors involved in such an occurrence, most of which have nothing to do with the endorser. Researching the company and examining its financials (if possible) should allow the athlete a better prediction of the company's success.
• Risk of investment- There is no question that any investment involves some level of risk, and that many athletes' financial investments have previously led them to financial ruin. However, equity for endorsement agreements carry a fairly low level of financial risk because the athlete would not be investing money. Instead, the athlete is only investing the time necessary for the required appearances and commercials. Therefore, even if the company folds, the athlete would be in the same financial position as he started. The low risk-high reward potential of endorsement for equity agreements is a substantial benefit to the athlete.

Disadvantages

• Delayed payment- Equity agreements may not be suitable for athletes who aren't financially stable or otherwise require immediate payment. These agreements can require that the endorser hold the stock for a period of time (several years) before it can be sold, thus delaying when the endorser can receive money for their endorsement. 
• Stocks are subject to division at divorce- In many states, stocks acquired during a marriage are considered community property, or are otherwise subject to distribution upon a divorce. Therefore, a portion of any equity in a company gained during marriage can be lost through divorce. Of course, this may not be a problem if a prenuptial or postnuptial agreement is in place. By contrast, a standard endorsement agreement for money raises the endorsers income, which could have other effects within a divorce proceeding, but does not directly alter property distribution. 
• Risk of investment- Although the risk of investment can be partially mitigated through careful planning and research, it must be noted that there is a chance that the company can fold, leaving the endorser with nothing. This does not leave the endorser in any worse of a position than prior to the endorsement, but ultimately receiving nothing for the endorsements is certainly a disadvantage that must be weighed. 
• Being tied to the company- Equity agreements associate the endorsing athlete with the company for better or worse. These agreements can require a vesting period of several years, with little means of canceling the contract (unless a reverse morals clause is present) should the company or its founder do or say something which damages the business and its reputation. Potentially, the damage to the business' reputation can hurt the endorsing athlete's established brand through their association. 

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.