In the business world, it is common for executives and key employees to receive equity as part of their compensation packages. Equity compensation, often in the form of options that vest over time, is designed to increase retention rates, incentivize hard work and innovation, and to reward key personnel for their contributions to a business’s long-term success.
Each of the underlying rationales for equity compensation in business can be extended to star athletes in professional sports. For example, the WNBA’s Las Vegas Aces could offer A’ja Wilson equity in the team with a 10-year vesting period to help keep her on their roster for her entire career. Similarly, the NFL’s Kansas City Chiefs could give Patrick Mahomes equity in the team to incentivize him to bring as many Super Bowl championships, and as much media exposure, as possible, thereby increasing the value of the team. While it is easy to understand why equity compensation for star athletes might make sense, in recent months, Major League Soccer (MLS) and the National Football League (NFL) have taken drastically different approaches on this issue, the results of which could impact the availability of equity compensation for all professional athletes moving forward.
In soccer, Lionel Messi – one of the sport’s biggest global stars – made headlines when he chose to sign with Inter Miami CF of the MLS over traditional powerhouses like F.C. Barcelona and Paris Saint-Germain. One of the key factors that led to this decision was Inter Miami’s offer of an equity stake in the club, which brought the annual value of Messi’s contract to an estimated $70,000,000.00. Messi’s decision to play for Inter Miami, which likely would not have occurred absent the offer of equity compensation, has been a boon for not only the club, but for the entire MLS. Since Messi’s arrival, the MLS has benefitted from record shattering ticket sales and increased revenue from streaming subscriptions and sponsorship deals.
Unfortunately for professional football players, the NFL has chosen a different path. Amid rumors that quarterbacks Aaron Rodgers and Caleb Williams were interested in deals that included team equity, the NFL owners voted to prohibit teams from granting equity to any of their employees. As a basis for this decision, the owners argued that granting team equity to employees, including players, would lead to salary cap issues and conflicts of interest if a player were to be traded or sign with another team. It is hard to view the ban on equity compensation as anything other than the owners protecting their own interests, especially in the era of increased bargaining power and entrepreneurship for star athletes. Further, many of the issues raised by the owners are not unique to sports and could be addressed through existing mechanisms. For example, if a business is concerned about an executive owning its equity but later taking a job with a direct competitor, the business can bargain for redemption rights, voting limitations, and a laundry list of other known protections when granting the equity. In short, the owners’ arguments against equity compensation do not pass the “smell test.”
Conclusion: The potential benefits of equity compensation for star athletes are substantial, as illustrated by the success of Lionel Messi’s contract with Inter Miami FC. Nevertheless, billionaire owners want to retain their team equity, especially as franchise values continue to soar, and are therefore likely to resist equity compensation packages. When future collective bargaining agreements are being negotiated in the NBA, WNBA, MLB, NHL, MLS, NFL, etc., players associations should push for equity rights, as their skills and efforts are directly responsible for ever-increasing franchise values.
Stay tuned to https://twitter.com/HBCSportsLaw or https://www.linkedin.com/company/hutchinson-black-and-cook-llc/ for the latest in Sports Law news and opinions.