Succeeding in Your Business: Got a famous friend? Here's how to deal with celebrity endorsements

By Cliff Ennico 

“Some friends and I started a web-based business targeting people who play a particular sport.
“As it happens, one of the leading players of the sport — a household name to fans — has discovered our website and absolutely loves it. We have approached him about possibly endorsing our website, and he has expressed an interest in doing so.

“What are some of the things we need to think about in putting together a deal with this person?”

In our increasingly celebrity-driven culture, this is one of the best things that can happen to a startup business. You should definitely do this deal, as long as the celebrity would not end up owning your business.

You need a celebrity endorsement agreement and should talk to your lawyer right away. Here are some of the issues you will have to consider in putting the deal together:

What exactly is the celebrity expected to do? In an endorsement contract, the celebrity licenses his name, image and likeness to your company for advertising and promotion purposes. The contract should spell out exactly what you expect the celebrity to do for your company. Here are some examples:

• Making himself available for photo shoots and live appearances.

• Being available on the website at specific times to play games with customers.

• Hosting classes and clinics on the website.

• Wearing clothing that bears your company name and logo when making public appearances or playing the sport in the real world.

• Saying wonderful things (scripted by you in advance) about your website whenever he has the opportunity.

• Promoting your website actively on his social media pages (including periodic tweets on Twitter).

Give the celebrity a royalty. There is nothing wrong with paying a celebrity a flat fee for his endorsement, but traditionally, celebrities get a royalty on company sales or revenue for the duration of their contract.

In crafting the royalty language, make sure the royalty is based on any increase in revenue that occurs after the contract date. Otherwise, if your sales dip (indicating that the celebrity endorsement isn’t doing its job), you are still legally obligated to pay the celebrity his cut.

Should the celebrity get equity in your company? This is a tricky issue, as the celebrity may want a piece of the action in exchange for your endorsement. If a celebrity insists on equity, do the following:

• Offer him options to acquire equity in the future, exercisable on or after a future vesting date (one year is customary). That way, the celebrity must pay for his equity and you have the chance to see whether his endorsement results in additional sales before you bring him on board.

• Make sure the celebrity gets nonvoting equity so he doesn’t interfere with your day-to-day management of the business.

• Make sure you have the right to buy the celebrity’s equity back in case he goes off the rails (more on that below).

Can the celebrity endorse other products and services? Celebrities make a ton of money from their endorsements (often much more than they make doing whatever they did to become celebrities), so they don’t like restrictions on their ability to cut other endorsement deals. At the very least, though, your celebrity endorsement contract should prohibit the celebrity from endorsing or lending his image or likeness to any website that directly or indirectly competes with yours.

Beware of any celebrity who wants to prohibit you from seeking endorsements from other players — celebrities often have grudge matches with their competitors, and if the other guy turns out to be a better player (or if a new hotshot comes along), you want to be able to switch teams, just like sports figures do all the time.

Must you disclose that the celebrity is getting paid for his endorsement? This has gotten a bit tricky lately. In 2009, the Federal Trade Commission (FTC) adopted new “Guides Concerning the Use of Endorsements and Testimonials in Advertising” (text available the FTC website).

While the FTC has always required that celebrities who say, “I use this product” in advertising actually use the product, the new guides go further and require advertisers to tell customers when celebrities and other people endorsing products and services (including celebrity bloggers) receive compensation of any kind for their endorsements. The guides are complicated, so make sure that any advertising featuring your celebrity’s name, voice, image or likeness is run by your lawyer before it’s published.

What if the celebrity goes off the rails? While there is no such thing as bad publicity, celebrities sometimes do things that generate bad press, and you don’t want your name associated with someone the public views negatively (no matter how much glee or schadenfreude we experience when celebrities bite the pooch). If your celebrity becomes the next Charlie Sheen, Tiger Woods or Lindsay Lohan, you want to be able to pull the plug.

But don’t be too impulsive. Disgraced celebrities sometimes claw their way back to popularity (especially when they die unexpectedly and tragically). Sticking with a celebrity when he’s down may pay huge dividends later on when he’s back on top.

Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.” 

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