In response to my article yesterday, a couple of people suggested asking for equity from wanna-be startup entrepreneurs who can’t afford to pay for a domain name. I like the idea of having equity serve as upside in a deal, but in practice, it is more challenging than simply asking for and getting the equity.
There are many considerations I make before even considering whether or not to ask a startup for equity in the company. Most importantly, I have to believe in the vision of the founder and team. There are plenty of successful startups that I think suck, but if I can’t see how the company would achieve a valuation that would give me enough upside, I am not going to offer a special deal to sell a domain name.
In order to evaluate the chances a company will become valuable in the future, I would need to understand their business model. I would also need to know the key team members who will make the business happen. Oftentimes, I find myself discussing a deal with someone who has barely come up with an idea let alone has a full business plan. Sorry, but I am not going to give up a valuable asset to someone that is still figuring things out.
There are other issues with taking equity in a company as part of a domain name sale. In order to properly accept equity in a company, particularly a fledgling business that might not even be a company yet, there needs to be a solid contract. I would also need my attorney to read the operating agreement and other legal docs from the company to ensure I am adequately protected and my corporate rights are strong.
There’s probably nothing worse in a situation like this where the domain name is turned into a unicorn brand and the company has done legal shenanigans to screw over the domain seller. This happened to someone I know (albeit not a unicorn) and it was very upsetting to him to see the company’s advertisements when it made it big.
With that said, legal fees can be quite high for the domain seller. It would likely easily get into the thousands of dollars for document reviews and exchanges. If a company can only pay a few thousand dollars for the domain name upfront, who is covering the domain registrant’s legal fees? It doesn’t make sense to do a deal for equity that costs more in legal fees than the company can pay for the domain name!
Ultimately for me, I am happy to take some amount of equity if that equity is the icing on the cake. If I am after $500,000 for a domain name I bought for $35,000 and the company can only pay $250,000, I would consider taking a couple of points of equity if I think it has a good chance of success.
In my experience, successful startup founders have very little interest in giving up a piece of their company at such an early stage, particularly to a domain investor who will add little value in the future.
If you believed in the startup’s vision, product and/or services; why not have them pay for your lawyer. If a potential buyer is agreeing to an equity deal on a $500K+ valued domain name, they should be willing to pay for domain sellers lawyer in an equity deal.
One of the hidden costs of an equity deal – lawyer fees. Buyer should bare the cost or pay the face value asking price for the URL.
I think that would depend on the size of the deal and how the negotiation goes.
How about Door #2 then?:
A deal that should be so simple you can write it yourself on a napkin or the side of a cow. Or maybe only spend hundreds instead of thousands for if an attorney is used.
Take a small % of all gross income. Maybe 2% or 1% or .5%, or perhaps set that % to change based on amount. Write that in too, with you having the right to audit and receive all revenue reports.
(Everyone knows the “net” is how you get screwed, so that’s off the table.)
You do not “give up” the domain. You have it set up the way it’s done for leasing, as I mentioned in the other thread.
Cancellation rights (for you) are written in, depending on certain facts, e.g. are they are even doing anything yet after so many weeks, etc.
Thanks for the detailed response, Elliot. I think you could get a lot of the answers you seek in their business plan. Surely, a startup has that at a minimum, as they might’ve already submitted it to a bank for the gust of wind to get them off the ground. From there, you can see if you’d be willing to invest $35k for potential unrealized gains that are out of the world. And if they fail? You get to keep the domain. It sounds like a win-win in most cases as a startup can easily obtain a 10m valuation, or, fail where the 35k falls right back into your hands.
At any rate, this was just a thinking exercise for other people to realize that they can leave a lot of chips on the table, especially if that company breaks 100m, which is not totally out there either.
This all is if you, of course, know who the buyer is and know what to ask instead of just asking for the money.
It may not always be the answer but it should always be the starting point on a truly valuable domain. If they don’t like that answer It’s sets you up to stay firm on your asking price.
Excellent info and advice as usual . . . from someone who actually knows of what he speaks. Thanks Rick.
Do you often ask for a fixed percentage or do you look at the valuation and is the ask variable?
No takers on % of gross revenue? Anyone ever try that yet?