Brand Partnership Pitfalls
-- by Jessie Gabriel
Let’s talk brand partnerships. These have always been important, but their value accelerated during the iOS app tracking change of 2022. Once brands lost the ability to easily track consumer behavior, they needed to find other ways to reach their audiences. Brand partnerships have picked up some of that slack. But they can be tricky.
Why do companies enter into brand partnerships?
There are a few reasons these collaborations are so appealing. First, you get to reach a new audience. Most agreements include required social media sharing with the celebrity’s, brand’s, or influencer’s community. When this works well, you get exposure to a group that is already your target audience but who you haven’t yet been able to reach directly. Second, when there is true collaboration involved, this keeps things fresh. We are all addicted to the dopamine hit that comes with a new drop. When two of your favorite brands come together to create a product for you, it’s a double dose. Third, celebrities and influencers can be strategic partners. If they are truly invested in your business and have unique expertise, they can be just as valuable as another service-based advisor.
How does equity compensation work in these agreements?
Most of these agreements have an equity component. The partner agrees to do X in exchange for Y equity. Within that framework, here are a few key terms you need to understand before signing anything:
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Equity amount. This is the percentage ownership the partner is getting. This varies widely depending on the value the partner is bringing and company stage.
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Anti-dilution. This means that the partners’ ownership will never get diluted down as the company issues more equity. This is a hard no for us. Founders get diluted, investors get diluted, and so should everyone else.
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Vesting. This is how long it takes for the partner to get their full equity award. You don‘t want to give someone all their equity upfront in case the relationship doesn’t work out. Just like you don’t get your annual salary on Day 1, partners should not get their full equity pay on Day 1.
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Acceleration. This means vesting gets accelerated in certain circumstances, typically if the company gets sold or if the agreement is terminated. This is tricky. What you don’t want is for the partner to terminate the agreement and then still get all their equity.
What about royalties?
The other compensation component of these agreements is royalties. These are most common when you are collaborating on a product launch. When negotiating the royalty component, the most important thing is to be crystal clear on how the royalty gets calculated. If the royalty is 2%, that’s 2% of what? Is it gross sales? What about returns? What about sale items? What about promotional giveaways? What about combination sales that include this item and other items? How long does the royalty last? What if you create a similar product to the collaboration product? The terms have to work with your business, so the terms need to be modeled out in your projections before you agree to anything. Brand partnerships always sound cool, but they need to be a good business choice.
What about intellectual property?
The IP terms are the other critical components of these agreements. If you are designing a new product, who owns the design? Who has the right to evolve that design? If a celebrity is posting, who has the right to those posts? Can you re-post? Can you use the images on your website? For how long?
Why are these agreements so difficult to negotiate?
Sigh. Negotiating brand partnerships is a frequent topic of conversation at All Places, largely because they are uniquely difficult. Why? The main problem on the celebrity side is the number of stakeholders you have to deal with. If you’re negotiating with a celebrity, you are actually negotiating with them, their lawyer, their manager, their agent, a third party who connects celebrities and brands, and maybe a few other people. Each one of those people is often showing up, trying to prove their value (and justify the fee they are taking off the top). This unfortunately often leads to behavior that does the opposite—destroys value by being unnecessarily difficult, causing the company to lose trust, and blowing up the deal. If you are negotiating with a much larger company, the main issue is leverage. They are bigger and much more resourced, so they think they can push you around and/or they can waste a ton of time negotiating while you cannot.
How is our approach different from most other lawyers?
We start each of these negotiations by getting clear on what matters most to our client, based on their business needs and our experience with these agreements. Then we do as much as we can to ensure all stakeholders are part of the conversation from the start (this avoids thinking you have a deal done and then learning there is a whole other round of review that needs to happen because some rando hasn’t “added their value” yet). Then we push things to completion quickly, pushing back where things really matter and being pragmatic about the rest. An agreement that seemed great in March might not seem as great if it takes six months to execute. Throughout the process, we remember that this is a partnership. We all want to work together for a great outcome—getting adversarial is a last resort and an approach that is rarely effective. We are driven by what is best for our clients—not what is best for our fragile little lawyer egos.
Final words of wisdom?
These are high-trust relationships, particularly if you are the less-resourced party. We can do as much as we can in the contract, but ultimately you are probably not going to want to take someone to court to enforce the terms. What you really want is a partner who is thrilled about your brand and personally invested in its success. What you don’t want is to give a bunch of equity or royalty cash to someone who is going to be fighting you every step of the way.
