A Look at Partnership and Development Structures for Online Businesses
I’m often asked how I prefer to structure a partnership with another business owner. After all, part of my ‘MO’ is to invest in existing online companies and/or domains and ramp up their marketing.
When you’ve got the chops to make a website purr, the challenge becomes finding the places to put your time and energy. Not just the right niches and timing, but the right partnership setups and well . . . partners.
Is it money up front? For equity? Buy the domain straight out or lease it with an option? Revenue share only?
With traditional angel investing VC, most of us know the common deal structures and ownership splits. People tend to ‘get’ the concept of putting money into a business for a defined stake over time.
But the internet world acts just as you’d expect when it comes to partnerships and the like – it’s more wide open.
Here’s a look at how you can approach a deal, and some pros and cons of each. Hopefully by the time I’m done writing it, I’ve figured out which option I like best.
Cash Up Front for Equity.
You invest cash in an existing web business in return for a % of equity.
This is as traditional as it gets, like the angel deals of the world of yesteryear.
Simple example. A site is making $20k per month. You agree on a value of 4x yearly revenue (~$1 million), cause it’s an up and comer. But it needs marketing help. So you drop in $50k for a 5% stake.
I like this setup cause it’s easy. I’d do it if the company already had a good base, like a kick ass software product that I was not going to do much to improve. It’d be a straight marketing push, apples for apples, that’s all I bring to the table and all i expect to earn on.
Of course, I’d like this deal a lot more if we add in a bit of . . .
Additional Equity Earned for Increase in Revenue.
Instead of just a straight cash for equity trade, how about getting some incentive as the business grows? After all, a straight 5% could get a little boring after 18 months. You want to stay motivated.
To look at my example, this means I’d start with the $50K investment for a 5% stake, then negotiate to get an additional 2% for every $xx in sales over the baseline revenue of the site or company. This is sexier to me, cause it has some performance-based incentive baked in.
Of course, you cap it, say at 15%. So you’re getting equity for cash and equity for expertise or “sweat”, and you’re instantly more interested in fast, ongoing growth.
It’s the traditional “growth partner” deal this one, and if there’s an existing online store with inventory and a management team that loves their business but just needs better internet marketing, this is my favorite deal structure.
The earned equity really keeps you watching the progress and gives more of a long-term incentive so the campaign never becomes one of “set it and forget it”.
Both of these are good options for existing businesses with a bit of an online presence. But let’s switch gears and talk straight domains.
Parked, old and crusty from 1999, at an auction, whatever. All of that stuff. How can those work out?
Again, we start with the simple one. Just buy it. Pretty nice if you can afford it, because you get full control to flip it, build it out, or sit on it for a while.
On this one, you need to be sure the domain is priced to fit your plan. Buying to flip is different than buying to build an insurance agency. If you want to flip it, it should be undervalued straight up.
Buying to build allows you to be a little more lax in my opinion. After all, if this is to be the vehicle for a $10 million business, the $25k vs $45k on the domain isn’t as material as a harvester might see it.
Lease to Buy.
Lease to buy is a cool option i seem to hear more people doing lately. Especially with domainers answering the call to build out more of their properties instead of parking them.
Leasing lowers the risk for the domain owner- he gets a flat rate per month or year, and only sells at certain points of tine or revenue that are agreed upon in advance. Example- I lease the domain at $2K per month with the option to buy it every 12 months for $60K.
If I don’t exercise the buyout option, the domain reverts to the owner.
Lease to buy is good for the developer/investor because you don’t have to put as much money up front, and you get to ‘test drive’ the domain. See if your intuition about it is right and it can grow and make money.
It’s also nice because we all know things can always change in a given vertical or SERP, with new competitors coming in, Google changing, suppliers or lead buyers entering/exiting, or potential acquirers losing their appetite to buy because the economy tanked. In short, it hedges you against external circumstances.
Do some Revenue Sharing.
Another one for domainers or existing businesses that allows for that type of test run and some flexibility is a “revshare”.
So I come in and the current revenue is $50K per month. Let’s say it’s an assisted living lead gen website. The owner doesn’t want to give up equity stake because he doesn’t know me well (yet), and even if I have a track record and look sexy in a pair of jeans, we need to see how this will work.
We set a defined timeline of 4 months. That gives me ample time to do some PPC testing, amp up the organic rankings, and see how we can push that $50K to $75K. The revshare deal is 50% of any upside over the baseline of $50K. After it runs, we agree to sit down and talk about a more long-term solution (like an equity stake, investment, or even a new LLC we share on the site) if all goes well.
Revshares also are the perfect solution if you’ve got a domain owner who never wants to sell their property, or lose control. Again, I’ll cite the current growing trends of domainers to test the waters in developing their domains vs parking. A revshare let’s them keep 100% ownership, gives a defined period of time for the marketer to go to work, and share in the upside.
Simply set the baseline at the average revenue the domain is earning parked over the last 6 months, or similar, and try it.
Got your mind spinning?
There’s infinite options on how to structure a partnership or deal to take a run at internet niches. Like I said, a 5 year old company that sells shoes online is going to come in at a much different place than a domainer who just wants to capture more revenue.
The skills to help bring each of them more money are probably much more similar than the structure you’ll end up finding works.