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.
Original article: Getting Equity is Not Usually the Answer
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