The Complexities of Player Equity in Professional Sports
The concept of professional athletes gaining equity ownership in their teams is gaining traction, but presents meaningful challenges within the existing framework of league collective bargaining agreements (CBAs). While conventional player compensation is structured around salaries governed by salary caps, offering equity - a stake in the team itself - introduces a new layer of financial and logistical complexity.
Currently, under the NBA-NBPA CBA, a player like Paolo Banchero could sign a maximum five-year contract worth approximately $40 million annually, representing 25% of the salary cap. This salary, while potentially fitting within existing cap exceptions, does count against a team’s luxury tax thresholds.
An choice approach - offering a lower salary, say $30 million per year, coupled with a 1% ownership stake in the team – immediately raises valuation questions. Determining the value of that 1% interest is not straightforward. Sports franchise valuations typically occur only during sales of shares. While Forbes estimates a 1% stake in a team valued at $3.2 billion could be worth $32 million, the actual value is contingent on factors like the rights associated with the ownership, resale restrictions, and overall market demand.
This valuation then leads to questions regarding how that equity should be treated under the salary cap. Should the $32 million value be applied solely to the year of the agreement, or should it be prorated over the life of the contract, similar to how the NFL treats signing bonuses? Furthermore, the tax implications of such an arrangement remain unclear.
Annual valuations of a franchise solely for salary cap purposes would be a complex, expensive, and potentially contentious undertaking. Selecting a neutral valuator would be challenging, given the inherent conflict of interest for both teams (wanting a low valuation for cap purposes, but a high valuation for potential sales) and players. The situation becomes even more complicated if the player is subsequently traded to another team.
The structure of modern sports franchises adds another layer of difficulty.Many teams are part of larger conglomerates encompassing multiple sports teams, real estate, and related businesses. Providing a player with equity in such a complex entity, where the basketball team is only one component, presents unique challenges.
However, a viable path forward may exist. The NBA-NBPA CBA already meticulously defines basketball-Related Income (BRI), the basis for calculating the salary cap. A multiple of BRI could potentially serve as a reliable predictor of a club’s value, based on comparisons to past transactions involving minority stakes in NBA teams.Sportico estimates that NBA teams are currently valued at approximately 11.9 times their annual revenue, offering a potential benchmark for calculating equity value for salary cap purposes.
Despite the potential benefits, significant hurdles remain. Currently, ther are few definitive answers regarding the feasibility of player equity ownership. However, leagues and players have a history of negotiating fair compensation structures, and it remains to be seen whether equity ownership will become a key issue in future negotiations.