I think a dream scenario for a domain investor is selling a domain name to a startup, getting some equity in that startup as part of the deal, having that company turn into a billion dollar unicorn, and selling the stock for many millions of dollars. This doesn’t happen very often. For the vast majority of startups that buy domain names, giving up equity at an early stage is too big of an ask. I want to share an idea I have when a startup will not give up any equity in a deal to buy a domain name.
When negotiating with a startup that will not offer equity to me but has a strong enough cash offer to make a deal work, I can ask for one concession I believe is a win for both parties: The option to invest in their friends and family funding round and/or their seed funding round.
This would be a win for me because I have the chance to invest in a startup at a very early stage. Once they have their domain name and begin operations, I will be able to have a look through their business plan and decide whether an investment in the company is right for me. I do not have an obligation to invest, but I have an option depending on whether or not I like what I see.
This would be a win for the startup because they are not giving up equity at such an early stage, and they would take on my investment in the same way they would take on an investment from friends and family in the future or in a seed round with other investors. Essentially, they are granting me the same rights they would grant to others in exchange for a cash investment should I opt to exercise this option. It costs them nothing at the time of purchase, and what they offer me they would offer to others anyway. If the business never seeks funding, it would not impact them.
It is important to reiterate that the cash aspect of the deal must be good enough to move forward on its own before agreeing to a deal. I would not depend on the investment option to make the deal worthwhile. Notably, a contingency like this should be memorialized as part of the purchase agreement.
Having this option gives me some potential for upside in the deal. It also eliminates some of the concern about seller’s regret.
This is a good idea. Effectively, you *are* getting equity as part of the deal if you do it this way. Take your $100k and invest $25k of it back into the company.
However, I would caution people to understand what they’re getting into when they invest in such as early stage company (one that is just now naming itself). Almost always your investment will go to zero. Also, depending on the corporate structure, you are likely to get a K-1 each year. When they lose money you get a benefit on your taxes; when they start making money you need to make sure they are making distributions to cover your taxes.
Finally, my experience is that startups usually send the K-1 to you very close to April 15, so you will likely need to file a tax return extension. They technically have until one month before tax extensions end to get the K-1 to you, so you might not be able to file your taxes until October.
This shouldn’t keep you from investing in startups but it’s something people should be aware of.
Good advice from Andrew.
The risk of losing money on an investment is why it is important to get the right amount of cash to sell the domain name before making this offer. The seller might also put a buy back option in the deal so he or she can re-acquire the domain name should the startup fail, but that is another topic.
Also, once the startup is at the point of taking outside capital, I recommend having a financial advisor take a look at their supporting documents / presentation to get a better idea of risks before making an investment. Of course, this advice is based on being able to trust the advisor. An untrustworthy advisor may say no because investing in a startup could mean less money for them to make traditional (commissionable) investments.
Always do due ample diligence before investing in a startup and don’t invest with money you can’t afford to lose.
Great post, great comments.
If anyone remembers the TEDx video about the saga of carvertise.com, the seller wound up buying 5% in the company for $50k as part of the domain deal. Looks like a great deal, and the contract was a hilarious handwritten piece of paper. The vid is well worth watching if you haven’t.
＼| ￣O￣|／
(Disregard, was just a test.)
Here’s the link to that video: https://www.youtube.com/watch?v=a_7EW0A3Q-0
I recently came across it, so had it handy.
I would suggest that every business person – not just domainers – take 18 minutes to watch the video.
It is a great domain story, told masterfully.
Companies are pretty good about diluting such shares in early rounds, that what sucks about those type of investments.
Contract term disallowing that?
excellent advice, Andrew.
I gave a name to a friend that he used to name his startup. It now has a valuation of over 1 Billion and with exponential revenue growth. I’m happy he’s succeeded. Very nice guy and very modest. Maybe he’ll remember me after the IPO 🙂
With a gift like that, he should remember you before the IPO.
What would be the procedure to do this. Would you need a Lawyer? How would you receive the shares in the company series A round? The shares won’t be showing up in your Etrade account so where resides the proof that company gave you shares in exchange for the domain name. Thanks.