Selling Domains for Equity
It can be difficult for startups to come up with the cash needed to buy a premium domain name. They’re spending money hiring people, building a product or service, and renting office space.
But great domain names can be an important part of a company’s branding. Some start-up companies bridge the financial gap by offering an alternate form of payment to the domain owner that doesn’t drain the coffers: equity.
Equity vs. Cash
Equity means shares in a company. It’s common for startups to use equity in the form of stock options to lure early employees who have the hopes of striking it rich. For example, early employees at companies like Facebook and Google made a mint when those companies went public.
Companies also use equity to pay for other services, often giving equity to early partners and even service providers like attorneys.
Giving equity in lieu of cash helps companies keep their burn low and hold them over until they can raise (or earn) more money.
Paying for Domain Names with Equity
Most aftermarket domain name sales are for cash. But some companies have creatively offered equity to acquire domain names.
One example is Uber. The ride-hailing company originally used the domain UberTaxi.com but wanted to upgrade to Uber.com.
Universal Music previously invested in a company that used the domain Uber.com. The company failed, so Universal Music owned the dormant domain name. When the ride-hailing company came knocking, Universal was willing to sell them the domain.
However, this was during Uber’s early days, and the company didn’t have much cash to throw around. So it paid for the domain by giving equity in the company. The equity at that time was valued at $107,148.
When Uber went public this year that equity was worth a staggering $532 million!
Unfortunately for Universal Music, it decided to sell its shares in Uber many years ago. It still did well—selling for $863,000—but it missed out on a lot of money by selling its shares early.
Another example where a company offered equity for a domain name is Dropbox.com. The company offered the seller $300,000 in cash or equity for their domain. The seller took cash.
Dropbox co-founder Drew Houston told Tim Ferriss that the seller would have had equity worth “hundreds of millions” if he’d passed on the cash.
Cash is King
While the IPO riches of successful companies are the stuff of lore, most startups ultimately fail. The person who sold the Dropbox.com domain might kick himself now, but most of the time taking cash is the right decision. If you take equity, you might be sitting on gold mine one day—but it also might end up being worth nothing at all.
You might also need some cash for your own business.
An alternative to all or nothing is to get some cash up front while also gaining some equity in the business.
That’s what domain investor Michael Cyger did when he sold Brew.com. He took cash plus a stake in the startup he sold the domain to. He thinks the deal will ultimately net him over a million dollars. But if Brew.com fails, as so many startups do, he still received a nice amount of cash for the sale.
In many cases, domainers can even negotiate to get the domain name back should the company fail. That way if the equity becomes worthless they still have the domain name.
Selling a domain name for cash is simple. Equity adds complexity to the deal. Before selling a domain name for equity, be sure to:
- Talk to a lawyer about legal ramifications. Owning equity in a privately-held company isn’t like owning shares in a public company. At a minimum, you will need a lawyer to review the contract and any shareholders’ agreement.
- Consult an accountant about taxes. The tax consequences of accepting equity vary by the type of deal (e.g. if it’s straight equity or stock options). Make sure to discuss the deal terms with an accountant so you don’t get stuck with an unexpected tax bill.
A Deal that Can Keep Paying Dividends
Making equity part of a domain name transaction can be a fun way to see your domain name bloom into a full-fledged business. It also gives domain investors something to cheer for even after selling a domain name.
Equity-for-domain deals are usually private arrangements. The Uber.com deal has thrown them back into the limelight.
What would you have done if an early stage startup called Uber inquired about buying your domain name?