Why Asking For Equity May Not be a Good Idea
I own a few domain names that receive acquisition interest from startups. I’ve always thought it would be neat to sell a domain name for cash plus an small interest in the company that is acquiring the name. If the company is hugely successful, the value of the domain name sale could soar.
After discussing quite a few deals that involved selling a domain name and receiving at least some of the consideration in equity, I have come to the conclusion that there are big issues for both parties.
From the sales perspective, selling a domain name for an equity stake requires the involvement of a good contract attorney that knows how to contractually protect the seller. I wouldn’t want to own an equity stake in an entity that turns out to be a worthless shell. I also don’t want my equity stake to be diluted nor do I want to be required to invest cash into the company, especially if the cash investment is substantial. Finally, I want to make sure I am protected if the startup fails or if the startup faces legal troubles. These are just a few items that need to be considered and negotiated in a deal that involves receiving equity.
Working with a lawyer can be expensive, especially when specialized advice is needed during the negotiation prior to having an agreement in place. A domain owner could spend many hundreds or likely thousands of dollars working with a lawyer to finalize various deal points to protect the domain owner’s interest, and the deal may not even go through! That’s a pretty big risk, especially if the cash component to the deal is relatively small. I do think working with a lawyer is essential when doing an equity deal.
From a buyer’s perspective, it can be difficult to deal with a domain investor who isn’t all that knowledgeable about startups and their needs. No startup founder is going to give up a ridiculous amount of equity to buy the domain name, so a domain owner who asks for a large percentage (but will play no role in the startup) is being difficult. Domain owners’ requests could also add to legal fees and take additional time to work out. If a startup is looking to move quickly, this could be problematic.
Selling a domain name in exchange for some equity in a startup sounds exciting. The domain owner is gambling that the startup will be successful, and if the owner is right, the domain name sale can be worth way more than if it was sold for just cash. There are many drawbacks to these deals, and the domain owner should look at it from the perspective of the startup, too, to see why it might not work out.
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