Getting a small ownership stake in a company that wants (or needs) a domain name I own is a nice bonus. That is how I look at getting equity as part of a domain name deal. Over the years, I have been asked a few times about this, and I have also discussed this option with several prospective buyers over the years. I want to share some thoughts based on my limited experience.
Taking equity in a company when selling a domain name can be advantageous, as evidenced by Rick Schwartz reportedly earning nearly $650,000 from the sale of his equity stake in Teem. This is on top of the cash payment he received after selling the startup the Teem.com domain name. We also recently learned that Dropbox offered some shares to the owner of the DropBox.com domain name. The owner took cash instead, and may have lost out on the potential to earn “hundreds of millions,” according to the founder of Dropbox, Drew Houston, as relayed by Andrew Allemann.
The idea of getting equity in a startup that becomes a unicorn is the stuff of dreams. I have found that it complicates deals and is more of a crapshoot than a surefire way to increase the value of a deal.
Based on my experiences, taking equity can add layers of complication and expense to a deal. In order to avoid issues in the future, I think it is important that the agreements are protective of my interests and give my company exactly what I expect should things work out. Negotiating an agreement that is fully protective can take hours of legal work and negotiation. It’s one thing to negotiate a sale of a domain name for cash, but something totally different to negotiate the terms for a small ownership stake in a fledgeling startup. Obviously, this can add substantial cost to a deal, and the deal is not even finalized at that point. It sucks to spend thousands of dollars in legal fees negotiating protective language on a deal that falls apart before it is executed.
I look at equity as a bit of a bonus. If I want to sell a name for $350,000 and the buyer can only pay $150,000 cash, I might agree to a deal if I can also get $150,000+ in the form of an equity investment stake. The caveat is that I need to believe that the company has a better chance than not of being successful and that the $150k+ worth of equity will have a very good chance of a solid return. Put simply, I need the equity piece to provide enough potential upside that I would be willing to forego an all-cash future deal with another entity.
I have been asked to sell a domain name straight up for equity, and I have declined. The only way I would do that is if the company is already established and the equity could be liquidated in short order for an amount close to my asking price. I suppose I would consider doing that for a small auction win or a hand registered domain name, but that has never come up that I can recall.
One other area I would be cautious about is if a startup founder would offer too much equity. For instance, it would be a red flag if someone offers me 10% of their company (or more) for a domain name I own. If a founder is willing to give up 10% of their company, I would likely think they either lack faith in their business or they don’t know what they are doing. More often than not, though, the opposite issue is true. The founder does not want to give up any ownership stake.
These are just a few of my thoughts on taking equity as part of a domain name deal. I look at accepting an ownership stake in a company as something extra when a company can’t pay the full asking price and I don’t want to sell it for the amount they can offer.