Non-Traditional Deals May Not Make Sense | DomainInvesting.com

Non-Traditional Deals May Not Make Sense

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I have this idea in my head that I will sell one of my domain names for cash plus equity, and the equity stake will become worth a substantial amount of money. Unfortunately for most of us, this is simply a pipe dream, and I think the likelihood of it happening is very slim. That being said, I have spent time negotiating deals like these, even though I know it might not make sense.

Equity deals can be complicated. In addition to a standard domain sales agreement, there needs to be other agreements necessary to memorialize the terms of the equity deal. These are usually far more detailed (and complicated) than a standard domain sales agreement.

When negotiating a non-traditional deal, it’s critical to hire an attorney to go over the terms. If a competent attorney that is knowledgable in these types of contracts is not used, it may be easy for the buyer to screw the seller out of the equity stake using a variety of loopholes or actions. If there are millions of dollars at stake, some people will do whatever it takes to maximize their interest, so it’s critical to use a good attorney.

Hiring a competent attorney that understands the intricacies of a complicated agreement can be very expensive. Attorney fees are a sunk cost, whether the deal goes through or not and whether the equity stake becomes worth something or not. A domain seller could easily spend thousands of dollars on attorney fees, and there is a possibility the deal doesn’t go through or the equity stake isn’t worth anything.

In addition to the fixed costs, there is a time consideration as well. It’s not usually easy to get a startup founder to give up equity in a company he or she is passionate about. There will be lots of emails and phone calls to discuss the details. Frankly, it wouldn’t make sense for a domain owner to agree to an equity deal like this without knowing the buyer, the buyer’s background, and the business plan for the company. This all takes time, and you can never get that back.

I am sure there are many ways a domain seller can get screwed on equity deals, and it is critical to spend the money and time working out the details. With all of this being necessary in an equity type of deal, it simply might not make sense to consider it.

One caveat to this is when an operating business wants to buy a domain name for a rebrand or because the product/company name matches a particular domain name. In this scenario, the domain owner can get already learn about the company and its financials. In a situation like this, the domain owner should have a great lawyer and great accountant to discuss the details. Although this can be more expensive, the owner will have a better idea about whether it’s worth the time and money to get a deal done.

What are your thoughts and/or experiences?


About The Author: Elliot Silver is an Internet entrepreneur and publisher of DomainInvesting.com. Elliot is also the founder and President of Top Notch Domains, LLC, a company that has sold seven figures worth of domain names in the last five years. Please read the DomainInvesting.com Terms of Use page for additional information about the publisher, website comment policy, disclosures, and conflicts of interest.


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Comments (5)

    todd

    Reading this reminds me of the graffiti artist David Choe who turned down $60,000 to paint Facebook’s office in exchange for stock and is now worth 200 million dollars.

    January 27th, 2015 at 12:20 pm

    John

    Is it simpler when you are talking about “equity stake” only in terms of specific quantities of shares of stock vs. any kind of non-stock “equity”? Is it still overly complicated in that case and vulnerable to being shafted? For example:

    1. Do you need a contractual term that prevents your % share in a company from being diluted by the issuance of more shares or something like that, or should you just be happy with having the shares which may even go up in value? For instance, the example Todd gives I would have been perfectly happy with – don’t care one bit about % stake if the shares become worth $200 million, or if income awarded to all shares stays the same or goes up.

    2. What about types of shares? Do you need to care about “common” stock vs. “preferred” or something like that?

    3. Should you therefore stick to corporate entities and identifiable shares of stock only, in which case no one can be given different income per share of the same class of stock than anyone else, yes?

    I had a suitor for one of my company’s domains not that long ago which I had alluded to here a number of times, too. Looked like a somewhat big player with a “bod,” which I took to mean “board of directors,” and it appeared people may be compensated with income per share according to my online research on them. They stopped contacting me after a while, perhaps because of condition developments related to the target industry of the domain, but it occurred to me that instead of the kind of big pricing I was mentioning for a straight sale, if they had wanted to talk further I could have offered to reduce the sale price dramatically in exchange for company shares that would share in the compensation all other shareholders get. But would the possibility of share % dilution still be an issue, though, for example, could the issuance of any new shares dilute income per share? I suppose it could, in which case one might need that lawyer to build in automatic compensation for such events. If they ever want to talk again about any domain I plan to mention that.

    January 27th, 2015 at 12:58 pm

    Kevin

    Creative deal terms help close nthe major domain deals. They take a great deal of time to get done and definitely require the full on involvement with a sharp team of attorneys to handle working out all the “what if” protection clauses you need to protect the interests of all the parties.

    February 2nd, 2015 at 11:45 am

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