"Sweat Equity" is when an investor brings something to a deal in lieu of hard cash. Traditionally, it refers to someone who invests time rather than money in exchange for an ownership stake in a business venture. These days, athletes are increasingly getting involved in business deals, using their cache instead of their cash to buy in. The value of having a marquee name as a business partner can be priceless to a company. As a leading entertainment, media, sports and advertising law firm, we increasingly see our talent clients – famous actors, entertainers, celebrity chefs, professional athletes and sportscasters – getting equity in exchange for giving a business the right to publicize the talent’s involvement and use his or her name and likeness to attract customers, investors, business partners, vendors and seasoned executives. As a pro athlete, you should be compensated – in fees and/or equity – for the "value add" to the business of associating with your personal "brand.”
Timing is Key
Whether you’re on the rise or at the top of your game, finding the appropriate sweat equity opportunity can be a winning strategy for long-term wealth creation and a possibly lucrative post-retirement career. Direct involvement in successful ventures builds your off-the-field business credibility. This authenticity – as a tastemaker – is what complimentary brands pay significant endorsement and sponsorship dollars for. While becoming a sweat equity player may be a smart move, athletes have unique interests to protect and should proceed with caution.
Strong Defense Leads to Solid Offense
Traditional investors are looking to protect their pockets but, as a celebrity investor, you also have to safeguard your reputation and your brand (your two most important assets outside the lines). This means two things. First, having sufficiently robust approval rights over the company's use of your name and likeness in promoting its goods or services and, second, going into these deals with your intellectual property (IP) well protected (also see our article in the Fall 2015 edition of AQ – Defend Your Trademark). You could be severely negatively impacted if your name or likeness is used in a way that offends your fans, key audiences, sponsors, team owners or league. You may even want the right to get out of the deal if changes in ownership or management of the company down the road threaten to damage your reputation.
Fouls Could Limit Your Success
If you’re investing sweat equity, you need to pay special attention to how your contribution is structured from a legal and tax perspective. These investments must be evaluated in the context of your financial plan, tax status and other business arrangements, including any competing or exclusive endorsement or sponsorship deals. Without the proper structure, you could be hit with a big tax bill upfront upon signing a deal with a well-funded company – even if you don’t get paid a cent at that time. This can be avoided with proper advice and planning.
Make The Heads-Up Play
Even though an investment of sweat equity won’t cost you anything from a cash perspective, you still have to be smart about it. That means you and your advisers need to do the necessary diligence to understand the company's financial health, its business plan and prospects, its management team and their experience and reputation, its ownership, its current and future commitments and, perhaps most importantly, how and when you can exit and monetize your investment. As a pro athlete, you have options – be strategic and leverage the brand you’ve created.
Deborah Wolfe is Co-Chairman of the Corporate & Finance Group at Frankfurt Kurnit. She can be reached at firstname.lastname@example.org.
Alan Sacks is a partner in Frankfurt Kurnit’s Entertainment, IP Finance and Sports Groups. He can be reached at email@example.com.