The athlete venture capitalist – the rise of athlete investors in sport
Leaders recently published a report compiling a list of the major funding rounds in the sports industry from June 2017 to November 2018.1 The analysis showed a total amount raised of over $1 billion with investments from leading venture capital funds such as Softbank and established corporate entities including BSkyB and ESPN. However, the report also illustrated the prominence of individual athletes in the sports investment ecosystem with a concentration on funding early stage companies operating in the sports technology sector.
This article analyses the drivers behind the rise of the “athlete investor”2, describes the different models of equity investment and offers guidance on the key legal considerations when executing a fundraising. It also draws out the benefits and risks for the athlete of investing in growth phase businesses and for the company in receiving investment from a high-profile player. It is accepted wisdom that the influence of athletes now extends beyond the stadia of professional sport and their prominence as professional investors is another part of this evolution.
What is driving the trend?
The intersection between athletes and corporate entities has historically been focused on brand ambassadorships and endorsement deals. The largest brands in sport have leveraged the power of individual stars to market products and reach consumers. While these traditional transactional relationships remain fundamental to the marketing strategies of major brands, an increasing number of equity-based relationships have emerged over the last decade.
The athlete investor landscape reflects the broader venture capital sector in being centred in the United States. Kobe Bryant, of Los Angeles Lakers fame, invested $6 million in sports drink BodyArmor in 2014. Following the purchase of a minority stake by Coca-Cola in August 2018, Kobe’s stake is now reported to be worth approximately $200 million.3 High-profile names in the NBA and NFL have sought to replicate the off-court success of Kobe with players such as Kevin Durant, the 2018 NBA Finals MVP, citing proximity to the tech hub of Silicon Valley as part of his motivation for moving to the Golden State Warriors.4
This trend from the United States has migrated to other geographies including the United Kingdom. Thierry Henry, Cesc Fabregas and Robin van Persie have invested in Grabyo5, a real time video editing, sharing and streaming platform for sports content, and Andy Murray has provided equity funding to over 30 ventures, many through his strategic partnership with equity crowdfunding platform Seedrs.6
The following factors have all contributed to the growth of athlete funded investments into early stage companies.
The growing influence of the individual: The advent of social media has enabled individual athletes to engage directly with their fans and create their own personal brands. Athletes are able to leverage their following and network to provide value to companies (especially those looking to promote products and gain market share). As a result, the model of “name-brand investing” is becoming increasingly attractive for companies who recognise the additional benefits that a high-profile athlete can offer beyond a simple financial commitment.
Access to investment opportunities: The increased prominence of celebrity investors in the funding ecosystem coupled with technological developments facilitating quicker communication and more transparent flows of information has forged a closer connection between the worlds of professional sport and venture capital. There are now examples of third party programmes and accelerators, predominantly located in the United States, which are specifically targeting athletes as equity investors. One Team Collective is a collaboration between the NFL Players Association and venture capital partners which is seeking to connect start-ups with current and retired players. The programme organises a pitch day in the week prior to the Super Bowl to facilitate connections with companies seeking opportunities for funding and access to player intellectual property rights.
Athletes as high net worth individuals: According to Deloitte’s Annual Review of Football Finance, the wage costs of Premier League clubs have increased by approximately 40% over the past five years.7 The increasing on-field and off-field financial rewards in professional sport combined with relatively short playing careers is fuelling more active consideration by athletes wishing to invest and deploy capital.
Athlete education: There is a more intense focus on the post-retirement plans of professional athletes and active recognition to avoid financial mismanagement which have historically been prevalent in previous generations of sporting professionals. Athletes are now increasingly receptive to building a network in the venture capital industry, seeking professional advice and collaborating with funds and start-up companies as a means of building a diversified portfolio of longer-term investment interests. This may also be attributed to the wider social glamorisation of the tech entrepreneur and the high-profile success of companies such as Facebook and Twitter.
Sports specific focus
The wider sports market has been an obvious area for athletes considering making equity investments. The athletes not only have a personal affiliation and experience within the sector but there are natural synergies with companies operating in the market who are able to leverage the contacts and personal brand offered by the athlete.
According to PwC’s 2018 Sports Survey, the sports industry is predicted to grow by 7% over the next three to five years.8 The survey reported that the industry stakeholder group who were most optimistic about future growth prospects were sports tech firms reflecting the wealth of opportunities in this market. Therefore, it is unsurprising that investing in sports tech has been an area of focus for athlete investors with NFL stars such as Russell Wilson and Aaron Rodgers backing VICIS a manufacturer of smart tech-enabled helmets and footballer DeAndre Yedlin participating in a funding round for Volt, a technology platform for professional strength and conditioning.9 The interaction between sports tech entrepreneurs and athletes has been aided by specific initiatives such as the annual Players Technology Summit, co-hosted by Andre Iguodala of the Golden State Warriors, which aims to bring leaders together from the technology, venture capital and the sports sectors.
In addition to the growing sports tech market, current and professional athletes have also invested in more traditional sports properties such as teams and competitions. LeBron James, through a partnership with Fenway Sports Partners, holds a 2% stake in Liverpool Football Club and Christian Fuchs, a defender at Leicester City Football Club, has launched his own esports team10 in a global market which is expected to generate revenues of $1.5 billion by 2020.11 Sporting stars have also helped to launch new competitions such as Paul Rabil, a professional Lacrosse player and investor, co-founding the Premier Lacrosse League with investments from Raine Group, Chernin Group, CAA and Blum Capital.12
Models of equity investment
The structure of an equity investment by an athlete will depend on multiple factors including the growth stage of the relevant company and the potential for the athlete to add value beyond a cash investment. An athlete investment is often more bespoke than a traditional cash investment with structures often reflecting the nuances of the relationships. The most common structures are set out below:
Pure financial investment – This is the most straightforward form of investment with the athlete providing cash to the company in exchange for shares. This more passive participation is less likely to contain bespoke terms reflecting the circumstances of the individual as a high-profile athlete. This may be structured as either direct equity participation by the athlete (potentially in a sector outside the sports industry where the athlete may have less specialist expertise or value to offer the company) or as part of a larger consortium investment group (e.g. through a venture capital fund). While this form of investment does not necessitate specific athlete investor terms, the athlete (or the investment vehicle through which the athlete invests) will still have the shareholder rights which are afforded under company law. Depending on the level of the equity stake and bargaining power of the athlete, additional shareholder rights may also be negotiated in the investment documentation.
Financial investment with strategic input – This type of deal combines a financial investment with a more direct role for the athlete in the strategic direction of the company. This could include an advisor role or a seat on the board of the company. This model is more common in companies operating in a market connected to sport where it may harness the insight of the athlete as a subject matter expert. For example, Luke Kuechly, a linebacker for the Carolina Panthers, made an equity investment in the sports nutrition startup "Eat The Bear" alongside taking a seat on the board of directors in order to make an impact on the business, develop the product and contribute to the company’s long term success.13
Hybrid equity / endorsement deal – This combines elements of an equity investment with that of a traditional athlete endorsement agreement. This structure involves the athlete receiving equity in exchange for cash (potentially at a discounted valuation). In addition, the athlete, often through their image rights companies, would enter into a separate endorsement agreement with the company which would de-risk the arrangement for the athlete by ensuring the athlete received payment for providing endorsement services and assigning their image rights. A common risk allocation in the endorsement agreement is the introduction of a minimum guarantee element combined with a revenue share between the athlete and the company.
Sweat equity – Sweat equity is the term used to describe the issue of shares in exchange for non-monetary consideration. This model does not require the athlete to make a cash injection but instead would likely require the provision of endorsement services and the grant of rights to the company in exchange for equity. This is more common for earlier stage companies who are willing to part with equity and may not have the financial resources to pay an athlete for their services. The lack of financial investment also provides a natural hedge for the individual athlete with no direct financial loss being suffered in the event of the company failing.
In addition to the investor route, certain athletes have taken an even more hands-on approach by founding their own companies. Derek Jeter, the ex-New York Yankee, founded The Players’ Tribune, a new media platform that provides first person written content from professional athletes. The company has subsequently raised $58 million14 from a combination of venture capital funds and individual athletes who have contributed content. In the United Kingdom, Hal Robson-Kanu is combining a current footballing career with co-founding Sports Ledger, a new sports focused platform that leverages the power of blockchain technology.15
The commercial negotiation of an investment will, of course, depend on the bargaining power of the respective parties and the size of investment. As a general rule, an athlete’s negotiating position will be stronger in the earlier seed rounds with likely a more standardised approach being adopted in the later series B and C rounds of funding. It is in the interests of both the athlete investor and the company for the legal position to be documented correctly and clearly understood by all parties. In a United Kingdom context, the key legal documents to be drawn up are listed below:
Articles of association – The articles regulate the internal affairs of the company and form the basis of the statutory contract between the shareholders and between each shareholder and the company. Each shareholder who subscribes for shares will be bound by the rights and restrictions in the articles. In particular, the articles will set out the rights attaching to the shares (for example, athlete investors may be able to achieve preferred rights to dividends or on a return of capital). In order to protect the individual shareholders from dilution, the articles of start-up companies will typically not disapply the statutory pre-emption rights in favour of the existing shareholders on the issue of shares. In addition, a pre-emption provision will also often apply on a transfer of shares enabling the existing shareholder a right of first refusal on shares which a shareholder wishes to transfer to a third party. From a company/founder perspective, it would also be recommended to include drag-along rights providing the majority shareholders with the ability to force minority shareholders to sell on the same terms in the event of a third party sale. There is commonly also a reciprocal tag-along right enabling minority shareholders to join any sale secured by majority shareholders.
Investment agreement / subscription and shareholders’ agreement – The investment agreement is entered into between the existing shareholders (including the founders), the company and the new investors. This agreement will commonly set out the completion mechanics of the investment, include warranties from the company and the founders and contain additional protections for the investors. These additional investor rights may include the right to appoint a director to the board, the right to receive periodic financial information from management and restrictive covenants which restrict the founders from competing with the company. This will interact, and will need to be drafted in conjunction, with the articles to ensure consistency and to avoid unnecessary overlap.
Corporate authorisations – In addition to the core commercial agreements, certain ancillary documentation will also be required to complete the investment. This includes corporate authorisations such as board/shareholder resolutions to allot new shares and disapply pre-emption shares. The company must also ensure it complies with its company law obligations including the filing of forms at Companies House.
It is important for the individual athlete to recognise that investing in early stage companies is high risk. A 2018 report into angel investment in the UK calculated that nearly 50% of early stage investments are written off.16 Therefore, while equity investments in start-up companies potentially offer significant returns (reflecting the greater risk of investment), a prudent athlete investor will carry out due diligence, meet with the founders and seek professional advice to mitigate the risks as well as consider spreading investments across a portfolio of companies and other asset classes.
An athlete’s involvement with early stage companies can play an important role post-retirement and provide a focus for the individual following the end of a playing career. Start-up investments are made in small private companies and therefore these shares are illiquid assets which are normally only realisable on an “exit”. The time horizon of an angel investor or venture capital fund to achieve an exit is commonly in the region of five to seven years.17 Therefore, these are relatively long-term investments which can be an important part of an athlete’s diversified investment portfolio.
If the athlete is a taxpayer in the United Kingdom, the incentive to invest in early-stage businesses is enhanced by government venture capital schemes. The Seed Enterprise Investment Scheme (“SEIS”) and the Enterprise Investment Scheme (“EIS”) offer investors income tax relief and capital gains tax exemption provided that certain conditions are met. Under SEIS, an investor may receive income tax relief of up to 50% on investments up to £100,000 and provides the investor with an exemption from capital gains tax provided the shares are held for at least three years. Under EIS, an investor is able to invest up to £1 million each year and benefit from a 30% income tax relief as well as the capital gains tax exemption. Companies are able to apply to HMRC for advance assurance that their investors will be eligible for SEIS/EIS tax relief. This will provide additional comfort to athlete investors who are considering making an investment with a view to benefiting from these schemes.
Advantages for a company
Nico Rosberg, the 2016 Formula One world champion, is one athlete who has become active in the venture capital community following his retirement from the grid. In an interview with The Financial Times, Rosberg captured the proposition offered by athletes for companies:
“I can also not only support financially, but also with reach because I have millions of fans around the world following me, for example, on social media. That’s a great asset which I can give to any company that I partner up with.”18
The key differentiator for an athlete investor as opposed to a fund or high net-worth individual is the marketing potential that the company can leverage through association with the athlete and the athlete’s network of followers and personal contacts. Therefore, depending on the investment model adopted, a company in receipt of athlete investment is fulfilling the twin aim of raising finance and generating interest through high value marketing. Furthermore, as highlighted by Kelvin Beachman of the New York Jets in a recent SportTechie webinar, athletes are able to make valuable contributions to companies based on their unique skillset formed by operating at the highest level.19 Therefore, particularly in the sports industry, the knowledge and experience of athletes as subject matter experts can be utilised by founders to refine and sell their proposition.
Recognising the risks
As for any athlete brand ambassadorship or endorsement arrangement, the company issuing equity to an athlete should consider the risks of being associated with the individual. The brand awareness gained from having an athlete investor can have an equally detrimental reputational impact if the athlete receives negative publicity or a lower than anticipated impact if the athlete is injured or retires.
An endorsement agreement typically contains morality obligations on the athlete leading to a right of termination if breached. Companies may consider including morality obligations in the investment agreement which may then provide the company or fellow shareholders with a contractual claim in the event of breach or even give right to a compulsory transfer of the individual’s shares. This is a similar construct to a good leaver / bad leaver mechanism which is commonly used when shares are issued to employees.
It is fundamental that both the athlete and the company are clear on the athlete’s obligations to promote the company alongside an equity investment. This was underlined in the dispute between Derek Jeter and RevolutionWear, an undergarment manufacturer, where it was alleged that Jeter concealed restrictions in his endorsement agreement with Nike that precluded RevolutionWear from disclosing his role in the company.20
The company should also consider the commercial viability of any arrangements entered into with the athlete beyond the issue of shares. If the company and athlete are to simultaneously enter into a services agreement or an image rights assignment, the company should consider the terms in the overall context of the stage of its business. This is particularly important if minimum guarantees or revenue shares are committed by the company in advance of generating a profit.
A partnership for the future
The natural synergies for athlete investors and early stage businesses are driving increased activity and closer co-operation. This mirrors the growing appetite for investment in the sports industry and opportunities to assist start-ups in developing and applying new technologies in a sports context. Athletes need to be acutely aware of the risks of venture capital investing, ensure investments are clearly documented and opportunities are appropriate for their individual circumstances. Modern athletes are increasingly commercially savvy and are starting to recognise the value which they can offer start-up companies. As more athletes and companies recognise this potentially mutually beneficial relationship, we can expect the trend of athlete investment in sport to continue to grow.
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Mike has a broad corporate and commercial practice which includes advising on M&A transactions, fundraisings, joint ventures and corporate reorganisations. He also regularly advises on governance issues in sport and was involved in the development of “A Code for Sports Governance”. Mike joined Northridge after over four years at Slaughter and May.
Recent work highlights include advising on the increase in Farhad Moshiri’s stake in Everton FC; the sale of digital design agency, W12 Studios, to Tata Consultancy Services; and the transfer of Cesc Fabregas to AS Monaco.
Mike is an active member of Northridge’s Sports Tech programme, acting for high growth technology businesses and investors in the sports and entertainment industry. He has also completed the BASL/ De Montfort Law School Diploma in Sports Law and Practice.
Jon provides commercial and corporate advice to clients. He is recognised by the directories as a “real go-to adviser” and a “commercial and regulatory expert”, with particular expertise on governance, corporate advice and commercial rights.