Non-Traditional Deals May Not Make Sense
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?
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