Creator Stock Option Pools (CSOPs)

Happy Tuesday Friends,

In today’s piece we discuss:

• the rotation away from brand partnerships

• Equity Stock Option Plans (ESOPs)

• the emergence of Creator Equity Stock Option Plans (CSOPs)

• examples of companies using CSOPs

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Introduction 👋 

It’s no secret that the advertising industry and brand partnerships are the lifeblood of the creator economy. Despite this not changing anytime soon, we see creators and their teams starting to diversify their revenue streams in an intentional, thoughtful way. This shift reflects a maturing creator economy, requiring a new playbook. "Creator Economy 2.0" focuses on producing higher-quality, more objective, and informative content, benefiting society as a whole. One emerging strategy is for creators to earn equity in startups by providing media services, product development support, and other contributions to help these companies grow and scale.

Some startups like GymShark and Celsius have predominantly built their brands by paying creators directly for their content, services, or through referral and affiliate programs. However, many startups lack the budget to do this. Instead, they can offer something more valuable: ownership. By granting equity, startups align long-term interests with creators, creating opportunities for shared value appreciation. Since every company is unique, offering equity is a significant decision for both parties and should be approached thoughtfully and intentionally.

One way to structure this type of relationship is through a Creator Stock Option Pool (CSOPs), which is similar to an Equity Stock Option Pool (ESOPs) many startups use for early and key employees. In today’s piece, we will outline why this is happening now, offer a brief explanation of CSOPs, and provide examples of companies that are using creator equity option pools.

Rotating Away from Brand Partnerships 🚨 

There are several problems with brand partnerships. First, when a company pays a fixed fee for a set of services, it is a purely transactional relationship that limits the value creation for both parties. Second, most startups can not afford the money creators charge for content and other brand partnerships. Startups simply can’t (and should not) compete with Fortune 500 companies on budgets allocated to creators. Third, we are seeing more companies of all sizes rethinking how they spend money in the creator channel as most campaigns end up not being very effective. Fourth, consumers are burned out on advertising and sick of creators slanging products with little to no meaning behind them. 

What’s interesting is this is all happening at a time when working with creators becomes increasingly important, as we outlined in a previous post, the Great Rotation. Consumers are losing trust in traditional media, governments, corporations, and other large institutions. The public’s trust is shifting more and more towards creators. Creators are the next power centers in culture, business, and beyond. This means there are endless ways a creator can help a company, and a company can help a creator.

The critical piece is you have to align the long-term interests between a startup and creators.  The best way to do this is with an equity or equity-type relationship. If done successfully, the creators will start to act like co-owners instead of ambassadors, often going above and beyond what is expected.

Quick Primer on Stock Options 📈 

In order to compete in today’s highly competitive landscape, startups must attract top talent willing to commit fully to their mission. However, startups often lack the budgets to match Fortune 500 salaries and ask early employees to take career risks, sometimes sacrificing significant income for years. To compensate, most startups use stock options to recruit, retain, and motivate key employees through an Employee Stock Option Pool (ESOP). Here’s a simple and technical definition of a stock option:

• Stock option (non-technical): a way for employees to own shares in the company they work for. Think of it as a way for the company to reward employees by giving them a stake in its success. Over time, employees build ownership in the company, and if the company grows in value, so does the value of their shares. It's like being part-owner of the business, which can be a great motivator and a way to share in the company’s financial success.

• Stock option (more technical): a financial incentive that gives the recipient (usually an employee, contractor, or investor) the right, but not the obligation, to purchase a specified number of shares of a company’s stock at a predetermined price (called the exercise price or strike price). If the value of the company and stock rises above the exercise price, the option holder can exercise the options to buy shares at a discount and potentially sell them at the higher market price for a profit.

As stock options allow employees to own a piece of the pie, it can result in financial benefits that can be much higher than the salary they may earn from a Fortune 500 company.

CSOP Examples 📖 

Structuring equity between creators and startups can be done in multiple ways. We have recently seen one model start to emerge: The Creator Stock Option Pool (CSOP). This is very similar to the ESOP described above where startups are typically setting aside a 5-10% equity stake to spread over multiple creators. In exchange, the creators will have a hand in promotion, product development, and more. Working with multiple creators can be a bit messy, so we recommend setting up a standard agreement and putting all creators into one entity (fancy name: SPV or Special Purpose Vehicle) so they are on one line on the cap table.

Companies use CSOPs in different ways based on what the individual company needs. Agreements can be attached to content, in-person appearances, product development support, and launching co-branded products together. We have listed four different startups that have used a CSOP and a short description of the assumed purpose based on the information we have gathered.

• The Swarm is a B2B SaaS tool that automatically maps a company’s former colleagues to find potential intros and lets them invite stakeholders to build a trusted referral network. The team set up a CSOP to offer B2B LinkedIn creators shares in the company in exchange for product feedback, promoting the tool, and referrals. Because some of the top B2B networkers in the world are using this tool, other networkers who aspire to be like them will create an incentive to use similar tools. 

• FYR, is a creator-owned live fire cooking brand. FYR was originally co-founded by Derek Wolf (9M+ followers). Derek has recruited and signed 22 of the other most prominent live-fire cooking content creators to come on board as equity holders through an option plan. Together they have over 50 million combined followers. Each creator has a hand in product ideation, feedback, GTM, content creation, and promotion to their respective channels. As these creators have grilled on every piece of equipment on the market, they probably know how to design the best grilling gear. If a consumer sees the top 23 creators in the space using a FYR grill, they will assume that it must be a brand to consider. 

• W, Jake Paul’s new personal care company is even using a CSOP. Jake has onboarded seven other creators as co-owners of the brand. Or, as he calls it, the Avengers. Jake is doing this for two reasons. 1) It makes W less reliant on him and less impacted if Jake is in the news for negative reasons. 2) Exposes W to a diverse set of independent audiences. Jake has onboarded a very diverse creator pool - females, males, athletes, non-athletes, American, and international creators. They all bring something different to W. 

• JuneShine, a hard kombucha brand that has onboarded 30+ creators on the cap table in exchange for stock options. Examples of creators that JuneShine onboarded are Evan Mock, Diplo, and Cody Ko. The main reason - get the word out about the brand and into the hands of people shaping consumer culture. JuneShine also launched limited edition flavors with a handful of the creators they onboarded through their CSOP to make them feel more ownership of the brand.

Conclusion 👊 

There is no one-size-fits-all as startups can use Creator Stock Option Pools (CSOPs) for different reasons. Every startup needs to carefully consider why it wants to create a creator stock option pool and what that could potentially look like. Once you have come to an agreement with a creator about joining your startup on an equity deal, you are not done yet. You need to think through complicated things like what types of equity you will issue. It could be RSUs, options, warrants, phantom equity, and some other alternatives. Each has its own tax implications.

While creator equity deals are often discussed, few are actually happening. Many creators are unaware of these equity opportunities or find them too difficult to navigate. Information on how they work is scarce and often too complex for creators and their agents to grasp. Startups and their lawyers throw around terms like pre/post-money valuations, pro-rata rights, preferred/common stock, and dilution, leaving creators confused.

At Cultured Supply, we are currently working with a handful of companies to structure these types of CSOPs. Eventually, we see creating a blueprint for structuring these types of deals, similar to what Y Cominbator has done with the SAFE note. If you are a startup thinking about launching a creator stock option pool and need help, feel free to reach out! We are always happy to chat.

Have a great week and remember to Go Direct!

Jordan & Scott

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