Revenue & Equity in Websites

September 27th, 2006 1 Comment

Let us assume that you have a great concept for a start-up website project, but are finding it hard to implement owing to a lack of resources- both in your time and in terms of your finances. You look for a partner and are lucky enough to find someone who likes your vision and concept for the website, and is prepared to share the burden of financing the project, as well as taking on a commitment for developing it going forward. It might be that this person is a friend and so you both simply decide to split everything 50/50 in a pretty amateur fashion and base your partnership on human trust.

Here’s the problem with that scenario. In all likelihood, we’re not talking about a great deal of money- whether you buy a website or start one- the costs are unlikely to merit going through the trouble of registering a company, drawing up Memorandums of Agreement, getting signed documents notarized and so on. The domain name itself will cost you less than $10, the hosting (depending on the type of site it is) less than $5 per month, the website design and content less than a few hundred dollars- so all in, you’re looking at approx. $500, which when split 50/50 is only $250. Just as a website that you might buy on an online forum- approx. $500, or $250 for you and your partner. Now to get a lawyer or an accountant involved would cost how much? Whatever the cost ends up being- would be extremely disproportionate to your initial, and projected investment. However, if your investment is a large one- say in the thousands, then you should indeed go down the conventional route.

So without such clear definitions, how do you sort out the equity and the revenue in your website project? And, if it is important, maintain a good relationship with your partner? Whose name will the domain name be in? Whose account would the adsense account be in? And how can you ensure that you both put in an equal amount of money, time and effort?

If your website project fails, none of the above will really matter- your problems are going to come if you do happen to hit on a winner. Let us again imagine a scenario whereby your partner had along the way lost interest in the project and stopped putting in the time, money and effort- while you had carried the can and brought it to success. You then want to cash out and gain rewards for all your hard work, but your partner reappears and is demanding a full payout of his/her 50%. You have nothing on paper except a few emails and instant message chats. Your partner is able to issue a DMCA against the site at the server, claiming copyright on the content of your site.

The nightmare begins….

So how can you avoid this happening to you? There’s really a very simple way, but it requires some ruthlessness of your part. Unlike other start-up businesses, unless you are planning big from the get-go, you should just not give away equity in your website. Share revenue to your heart’s content- you can show your partner(s) screenshots of your adsense account, TLA account and other affiliate earnings- or even provide them access. But you own the domain name, you retain ultimate rights to the site’s files- graphics, content, software, etc. Many people, thinking only short-term, will just want revenue share anyway and not even think about equity. Take advantage of this and keep 100% for yourself. If this just isn’t possible- then at the very least maintain a majority- so 51%. This will allow you to structure your initial partnership idea using revenue as a leverage, not as a right- i.e: if your partner doesn’t pull through on their side of the bargain, then their right to revenue share is withdrawn.

Following this strategy may well save you a great deal of headaches in the future!