On Aug. 5, BODYARMOR announced the addition of Christian McCaffrey, Trae Young, Sabrina Ionescu, CeeDee Lamb, Kemba Walker, Drew Lock and Ronald Acuña Jr., to its stable of athlete endorsers (which already included Angels star Mike Trout and Rockets All-Star James Harden, among others). All seven received equity in the surging sports drink company (see: recently surpassed Powerade in sales) as part of their respective deals. Just one day earlier, BioSteel Sports Nutrition disclosed that Super Bowl MVP Patrick Mahomes had become an equity partner in the company as part of a multi-year endorsement pact. Awarding star athletes equity in exchange for their endorsement is not a new concept. BODYARMOR Founder and Chairman Mike Repole pioneered the practice 20 years ago with Vitaminwater and Smartwater. But with the market for athlete endorsements softening (see: the amount of guaranteed money being offered is declining), it’s fair to wonder if brands are better off striking all-cash deals.
Our Take: Equity is a particularly expensive form of capital, so if a company has cash on the balance sheet to do a ‘standard’ cash-for-endorsement deal, Jasmine Robinson (Principal, Causeway Media Partners) says most companies would be wise to do so. Repole didn’t have that option when he first introduced the equity deal structure back in the early 2000s. “Back then we didn’t have the cash to offer partners, so we offered equity instead,” he said.
While Repole’s early deals were done out of necessity, the current equity-for-endorsement trend is being driven by the athletes. He said that today’s pro sports stars are “most interested in the equity and owning a piece of the company [as opposed to the cash compensation].” It’s reasonable to attribute the change of heart to athletes’ recognition of their own value—namely, their social media followings and the general public platform they have. The size of modern-day on-field contracts would also seemingly make today’s stars more agreeable to foregoing cash up-front in favor of a potentially large payday years later.
Of course, it takes two to tango, and companies have been more than willing to award athletes equity-for-endorsements. With today’s sophisticated consumer placing an emphasis on brand authenticity, it’s certainly logical to present athlete endorsers as stakeholders in the company, not just as paid spokesmen or spokeswomen. Naturally, athletes also become far more engaged in the company’s marketing efforts when he/she has a vested interest in the business’s future.
To be clear, Robinson isn’t advising against equity-for-endorsement deals; it could be the right move from a brand perspective depending on where the company sits within its lifecycle and what it is looking to get out of the relationship. But she does believe it is important for companies to “include performance-based metrics in the deal that are commensurate with the equity compensation being given [to ensure ROI].” It’s unclear if BODYARMOR includes performance benchmarks within their deals with athlete endorsers. The company would not offer up any specifics about those agreements.
The reason it matters where the company sits within its lifecycle is that early-stage and late-stage companies have different goals in mind when they sign endorsement deals. Earlier stage companies are expecting athletes to build consumer awareness, while those in the later stages are looking for athletes to drive brand affinity. Robinson said athletes can be “equally effective” at both stages.
The cost of capital can also vary greatly. “If you’re a challenger brand and the segment has a large total available market (see: BODYARMOR on both accounts), then awarding a nominal equity tranche to an endorser can be a good move,” said Chris Lencheski. But the CEO of Winning Streak Sports added it’s a much riskier proposition for an early stage company (particularly if there are no performance metrics in place). “The amount of equity a start-up might have to give to attract a high-profile athlete could very well be prohibitive,” he said. For what it’s worth, Repole said his companies have “never looked at these partnerships with any financial barometer of whether we under- or overspent. Many of these athletes were the first true believers in what BODYARMOR stood for, and they have been ambassadors and trendsetters who influence athletes of all ages to see in BODYARMOR what they saw all along.”
If costs to ink a deal with a superstar are prohibitive, early stage companies might find themselves better off aligning with ‘tier-two’ athletes or influencers. Robinson explained that there is a lot of value in those audiences, and naturally they cost less to sign. While inefficiencies in the market have prevented brands from striking deals with tier-two endorsers in the past, there are a series of sponsorship marketplaces trying to change that. Smaller brands aligning with more niche audiences is a trend to keep an eye on moving forward.
In an ideal world, start-ups and challenger brands would sign athlete endorsers that are also willing to invest capital in the company. Robinson said that within the early growth stage sports-tech and sports media companies her fund looks at, “Much more often [than not] athletes are coming on as investors rather than just having equity given to them.”
It should be noted that nearly all of the equity-based deals signed of late have been limited to start-ups and challenger brands (i.e. we haven’t seen Nike or Gatorade ink one). Later stage companies with access to the capital markets continue to use cash as the primary incentive for athletes to endorse their brands.
JohnWallStreet Index: 3,608.77 (+0.23%)
NASDAQ: 11,210.84 (+0.73%)
S&P: 3,389.78 (+0.23%)
DJI: 27,778.07 (-0.24%)