How Fans Can Invest in Athletes: The Ultimate Fantasy Sport
On the heels of the largest transfer buyout in the history of professional sports, Neymar’s transfer from FC Barcelona to Paris Saint-Germain, let’s take a look at how athletes could use equity crowdfunding (or an ICO) to sell shares in their brand to the public.
What were talking about here is the ability for sports fans to invest in their favorite players. In exchange for a contribution of capital today, fans would be able to buy shares in a player’s brand, representing a claim to a percentage of future earnings. These shares would then be able to be bought and sold on a secondary exchange for private securities, providing instant liquidity for investors who need to cash out.
The main objections I always hear when discussing the topic are:
- How would you value a player’s brand?
- Why would a player want to sell a share of his future earnings?
- I hear about players going bankrupt all the time, wouldn’t this incentivize that kind of extravagant behavior?
So let’s explore a theoretical transaction involving Neymar selling a stake of equity in his brand, while addressing those objections. The ultimate goal is to create surplus value for both the player and fans who invest in the player.
How would you value a player’s brand?
Quite simply, we project out the sum of a player’s future earnings (salary + endorsement deals) and then discount it to present day value. The exact same way equities are valued on the stock market.
Born on February 5, 1992; Neymar is currently 25 years old. We know his salary for the next five years ($53 million per year) and then we can use Lionel Messi’s recent contract extension signed at the age 30, as a proxy for Neymar’s follow-up contract.
After discounting the total projected earnings for Neymar’s career, we come to a present day value of $542.7 million. Since Neymar would only be selling a 20% stake in himself, we can calculate a market capitalization (“market cap”) of a potential security offering at $108.5 million. Let’s assume the offering is for 1 million shares, meaning the price per share is $108.50.
What this means is that a fan can buy a share for $108.5 when it is first offered. If Neymar has a fantastic couple of years with PSG and wins the Ballon d’Or for example, we can assume that share price would increase. On the flip side, if Neymar were to incur a career-threatening injury, the share price would plummet.
Explanation of Financial Calculations
Total Projected Future Earnings of Neymar’s Career = $619 million
- Projected Future Earnings = On-Field Earnings + Off-Field Earnings
Present Day Value of Projected Future Earnings = $542.7 million*
- *Discounting cash flows at a discount rate of 5%
Neymar sells shares representing 20% of Projected Future Earnings = $108.5 million market cap**
- ** Market Cap of Share Offering = Projected Future Earnings ($619 million) x 20%
Price Per Share Calculation
- $108.5 million market cap / 1,000,000 shares = $108.5 price per share
Calculations of Projected Future Earnings
On-Field Earnings
Current Contract
- 5 years @ $53 million per year, $265 million
Projected Follow-On Contract (Extension)
- 4 years @ $31* million per year, $124 million
* Based on Lionel Messi’s contract signed in 2017, at 30 years of age
Off-Field Earnings (Endorsement Deals)
Historical Figures: $22 million made from endorsements in 2016, per: https://www.forbes.com/profile/neymar/
Short-Term Projection of Endorsement Deals
- Assuming an increase to $30 million per year in 2017–2021
- $30 million x 4.5 years (August 2017 to Dec 2021)= $130 million
Long-Term Projection of Endorsement Deals
- Assuming a slight tick-down to $25 million per year from 2022–2025
- $25 million x 4 years (Jan 2022 to Dec 2025)= $100 million
Sum of Endorsement Cash Flows for Remainder of Career
- $130 million + $100 million = $230 million of projected endorsement earnings during playing career
Why would a player ever want to sell a % share of his future earnings? Two reasons: Time Value of Money & Building a Cult-Like Social Following.
Time Value of Money refers to the fact that a dollar today is worth more than a dollar several years down the road. So by selling a stake in their future earnings today, players will be able to access capital today.
Being able to raise capital today can cure a number of issues that almost all professional athletes face early on in their career. Accessing capital today can be used to begin building an investment portfolio and allow players to begin to expand and diversify their wealth earlier on in their careers, when most players (even superstars) make pennies on the dollar compared to once they are eligible to hit the open market or free agency.
What better way to connect with fans than offering fans the ability to own shares in your brand? Now every at bat, every goal or every slam dunk makes fans cheer even more because the players’ success actually can make you money. Or what about the fact that a single player can now have a cult-like following of 100,000 shareholders who want to see you succeed, both on the field and off the field.
Those 100,000 shareholders become super fans, sharing your tweets and telling others about the player. When a player negotiates endorsement deals, having 100,000 super fans to market to can carry significant negotiating power for the player; thus making them more money on endorsement deals than if they did not sell shares. With the rapidly changing landscape of marketing and endorsement money going from traditional TV outlets to social media platforms, athletes building such a following will provide a substantial ROI to their bottom line.
The other major issue that can be cured is leverage in contract negotiations and protecting a player’s financial future in the case of a career ending injury. The number one fear of successful budding stars is not being able to cash in on their success and set themselves up fiscally beyond their playing days.
If a player is able to sell shares early in his career and access a sizeable amount of capital, it will reduce the worry about financial impact from injuries. What this will do is offer players greater leverage when it comes to negotiating contracts, allowing them to test the open market and not fall victim to signing a contract negotiation at a well-below market value rate. In our example of Neymar, the injury factor is less of a concern (since he’s due to receive $200 million+ guaranteed) but if you look at MLB & NFL players signing pre-free agency contract extensions, you will notice that they are often offering close to a 40% discount in exchange for guaranteed money.
Athletes go broke all the time, won’t they steal my money?
This answer has the most grey area but I think there are several solutions to ensure the greatest protection against fraudulent behavior.
The offering document for shares will be a registered document with the SEC, the same process a corporation files prior to selling shares in an IPO (initial public offering). In this document the use of proceeds from the sale of shares will be detailed. In any legitimate transaction, players will need a well-thought out and justified reason for raising capital. Some of these include: pursuing vetted investment opportunities, building an investment fund managed by professionals, declining a below market value contract offer to test the waters in free agency. If a player does not end up using proceeds for the reasons outlined, then they will be subject to shareholder claims in the form of a lawsuit, so it’s not like the shareholders are completely without recourse.
Furthermore, great lengths will be taken to ensure that players report all applicable earnings and that the appropriate share of those earnings are set aside as dividends to shareholders (in our example this was 20% of earnings). So each paycheck the player receives, 20% will automatically be set aside into an escrow account which will then be distributed pro-rata to shareholders at the end of each quarter. This is where a player’s manager, agent and the underwriter of the securities can help provide structure and a plan in place to avoid running into any grey areas.
Of course there are always outlier situations and there are examples of fraud in even the largest of corporations (see Enron). But with strict auditing and reporting compliance requirements in place and explicitly laid out prior to launching any offering, I’m confident the risk of fraud in this type of transaction will be mitigated to a large extent. As with any financial transaction, transparency, vetting and planning are critical.
What are your thoughts on the topic of being able to invest in pro athletes? Do you think this is merely a pipe dream or would you be willing to invest your hard earned money in your favorite athlete? What factors would help provide you with the comfort to take part in such a transaction?
Tom is a co-founder of Global Sports Inc., a crowdfunding platform that connects sports fans with sports products, charities and organizations seeking to raise capital. Prior to launching Global Sports, Tom worked as a leveraged finance investment banker at Bank of America Merrill Lynch and Alvarez & Marsal. An avid New York Yankees & Giants fan since birth, Tom is interested in all things sports, finance and cryptocurrency.
