The following is a guest contribution by Brian Heidelberger. Information about Mr. Heidelberger is located at the bottom of this post.
The NBA draft is right around the corner and whatever number your player is picked, he’s going to have to pick up not only his game, but also his business skills, unless he wants to end up as one of the 60 percent of NBA players who are broke within five years of retirement. Some pro athletes have it down, and I have been privileged to provide legal counsel to a number of professional athletes who have their act together. But no matter who your player is, they each face similar issues, and what separates them is how they handle the pressure. So before your player signs his first big shoe deal, here’s a list of business moves that he should make.
#1: Get Extra Insurance and a Will
Your player needs to look into getting life, primary and umbrella coverage, and disability insurance, as well as a will. While the death of your player is unlikely, it’s not unheard of, as more than 100 NBA, MLB, and NFL athletes have died during their careers. Without a significant life insurance policy on top of the minimal one that may be provided to all players under the league’s collective bargaining agreement, death would mean financial ruin for those who will soon depend upon his income. This is especially true if there’s a lockout, when benefits could be rescinded or suspended. When the NFL’s Darrent Williams was murdered, the life insurance coverage provided under the league’s collective bargaining agreement was insufficient to provide for his two kids, causing the Broncos to establish a fund for fans to help provide for his kids’ futures.
Your player also needs a significant primary and umbrella liability policy, which will provide protection from the lawsuits he may be hit with now that he’s a professional. If he’s using social media, make sure the policy covers claims like libel, which are not always included.
And since he hasn’t yet built up his bank account, a disability policy should be considered to protect him from a career-ending injury leaving him broke. Your player may not get the same treatment as the NBA’s Jay Williams, whose contract was voided from a career-ending motorcycle injury, yet the Chicago Bulls were kind enough to pay him out. This is especially true given the pending NBA lockout, because with no guaranteed contract available during the lockout, an injury during an informal workout or other activity could leave your player with no future income and no health insurance.
Finally, remind your player that a will likely only costs a few thousand dollars, but can prevent disastrous consequences. For example, when the Redskins’ Sean Taylor died without a will, only his daughter inherited, leaving the rest of his relatives that had previously relied on his income with nothing. When Steve McNair died without a will, he left his family with no access to his $19 million estate for more than a year.
#2: Play Defense With Money
Given the high income/short career span of your pro athlete, a conservative investment approach is the way for him to get and stay rich. Many athletes are enticed into alternative investments either by friends, family, or new acquaintances. Unfortunately, these investments are unlikely to make 50 Cent money, so any opportunity should be vetted by an advisor who is highly qualified and, most importantly, who has no stake in the outcome. At the very least, your player should set aside only 10 to 15 percent of his liquid net worth for these higher-risk investments. Learn from Scottie Pippen, who went broke within six years of retirement, losing $120 million in career earnings, with $27 million lost on bad business deals.
#3: Limit Risk on Endorsements
If your player decides to have an ownership stake in a corporation he’s endorsing, make sure that the company he’s investing in provides insurance and agrees in writing to defend legal claims on his behalf. And if the product is high-risk, like a nutritional supplement or new-fangled sports device, make the company provide a legal opinion vetting the legality of the product and its marketing claims, since federal law says your player may be personally liable for his endorsements. At a minimum, he should be very careful about representations he personally makes, about the product or that the company attributes to him. Both Shaq and Lamar Odom learned this from the class-action lawsuit they are currently facing for their endorsement of Power Balance bracelets, which alleges that they should have known there was no reasonable basis for the marketing claims they made about the product’s benefits.
#4: Add Value to an Existing Foundation
It’s likely that your player has no time, isn’t an expert in running a charitable organization, and that his pet cause is probably already being served by a qualified, well-run organization. If true, he may be better served helping out pre-existing organizations, rather than creating his own. There are obviously positive exceptions, like Alonzo Mourning Charities and the Steve Nash Foundation, but starting and maintaining a foundation costs hundreds of thousands of dollars and requires navigating complicated law. In a best-case situation, it will likely be years before your player’s foundation makes a significant difference, and at worst, he’ll end up like ex-Cub Sammy Sosa, who was awarded MLB’s Roberto Clemente Man of the Year award for charity work and only one year later, his foundation faced allegations of misuse of funds.
#5: Get His Online House in Order
Given that more Americans get their news from the Internet than from newspapers or radio, it’s critical for your player to establish an online brand. Having a lawyer stop the online imposters and cybersquatters is a great way to start. Ask Chris Bosh, who sued when he got tired of not being able to use his dot-com and not only won it back, but also offered to return more than 800 other cybersquatted athlete domain names to NBA players like Danny Grainger and Jared Dudley. Ask the ex-New England Patriot Rodney Harrison, who had an imposter use his Twitter handle to pick a fight with the Jets’ Kerry Rhodes without Rhodes realizing it. Or the Miami Dolphins’ Davone Bess, whose Twitter imposter hosted a fake chat and even got the Tennessee Titans’ Chris Johnson to agree to a footrace.
Once the brand is under control, your player needs to avoid messages that make him fodder for Deadspin and TMZ. Every post effectively constitutes a press release, so they should be vetted carefully. The WNBA’s Cappie Pondexter learned that lesson after her offensive Tweets about the Japan tsunami. So did the Pittsburgh Steelers’ Rashard Mendenhall, whose four-year Champion endorsement deal was recently terminated after his offensive Bin Laden Tweets. As did both Gilbert Arenas and Reggie Bush, when Arenas was fined by the NBA for Tweets about sexting and Bush was publicly criticized when he Tweeted how much he was enjoying the NFL lockout. And if your player is too busy to post his own messages, make sure that whoever is posting on his behalf is overly cautious. Learn from Braylon Edwards of the New York Jets, who was sitting in jail after an arrest while someone embarrassingly tweeted, “Good Morning World!”, under his Twitter account.
#6: Use A Corporation Properly
There is value to your player in setting up an LLC or corporation, although the true value lies in knowing what benefits the corporation actually provides and in using the corporation properly. Many set up a corporation mistakenly thinking that it’s some sort of tax shelter, but its main purpose is actually to shield the player’s personal assets from lawsuits. However, that protection will only be available if the player keeps the corporation in good standing with the state and observes other legal formalities, actually enters into business deals through the corporation, pays his staff via the corporation, has his cars owned by the corporation, and generally doesn’t treat the corporation like a personal piggy-bank. While that all sounds totally obvious, more often than not, we see players fail to abide by these simple rules.
So good luck to your player on draft day. But remember, what’s really important is not the deal they make today, but what they do over the coming years that will shape their future.
Brian Heidelberger is a partner and Chair of the Advertising, Marketing, and Entertainment Law Practice at Winston & Strawn LLP, a global law firm, and has provided legal advice to a myriad of professional athletes, including Dwayne Wade, Luol Deng, Donovan McNabb and Kevin Durant, and represented Chris Bosh in his 2009 cybersquatting case (email@example.com & www.winston.com/bheidelberger).