Tuesday, September 3, 2013

I've Got the Brains, You've Got the Looks: Structuring a Domain Name Development Joint Venture

By Zak Muscovitch.

After taking a summer hiatus from blogging, I am pleased to present my latest installment.

Domain name development joint venture agreements hold a lot of appeal for both domain name owners and for website developers. For domain name owners, they may get to finally fully exploit an underused domain name. For website developers, they may get access to a premium domain name that they could otherwise not afford. Accordingly, this can be a marriage made in heaven in many respects. Nevertheless, domain name development joint venture agreements can be amongst the most complex domain name legal agreements that you will encounter in the domain name legal world.

In many situations, a domain name development joint venture can be divided up into several "phases".

Phase 1 - The Pre-Joint Ownership Period

Even though a joint venture has the potential to be a "marriage made in heave", as aforementioned, it can be a mistake to share the assets of the marriage on Day 1. In the case of a domain name development joint venture ("DDJV"), the asset is the domain name or domain names, to be developed. At the beginning of the relationship, the domain name(s) are generally not jointly owned; the domain name(s) remain(s) the sole property of the domain name owner.

The reason for this is so that there is an appropriate trial period where the developer's abilities, the developer's results, and the relationship gets tested. If it works out, great, then the relationship can move forward into Phase 2. If not, then at least the domain name(s) can be easily pulled back from the joint venture, without having to be concerned about who owns the domain name(s), or who owns what percentage of the domain name(s).

Accordingly, during Phase 1, certain performance thresholds will have to be met in order for the parties to move on to Phase 2, which will involve an equity interest in the domain name(s) by the website developer.

Notwithstanding that the website developer will not earn an equity interest during Phase 1, the website developer will however, usually earn 50% or some other percentage of all net revenues, with provisions being made for any third-party costs associated with developing and marketing the website.

Even though the website developer may not be a joint owner of the domain name yet, the website owner will likely nonetheless have an interest in ensuring that the domain name remains free and clear of any encumbrances during the time period that the developer "earns" his ownership interest. For example, the developer won't want to invest considerable time and effort throughout Phase 1, if only to learn that the domain owner had sold or leased an interest in the domain name to a third party in the interim. Accordingly, often the developer will want the domain name owner to agree to have the domain name put into escrow with a domain name lawyer or other escrow agent, in order to secure it while the developer "earns" his equity stake.


Phase 2 - The Joint Ownership Period

If the performance thresholds (such as traffic and/or revenue) are met during Phase 1, it may be time for the website developer to begin to earn a share of the ownership of the domain name and website. But the issue then becomes how do you legally share ownership of a domain name since a domain name can only be registered to one person.

One way of sharing legal ownership of a domain name and associated website, is to create a corporation, and then transfer the domain name(s) and ownership of the website content, to the corporation. The corporation would then be listed in the Whois as the registrant. The corporation would issue shares to the domain name owner and to the website developer, on an agreed basis. Sometimes, the website developer's interest will be staggered, e.g. he or she will earn a percentage over time, based upon performance, all the way up to 50%. Sometimes, the website owner will however, continue to be entitled to 50% of revenues, even if he or she has not "earned" 50% of ownership in the domain name and website yet.


Exit Strategies

Once the corporation is in place and is the legal owner of the domain name(s) and website(s), then a shareholders agreement should be put in place. This shareholders agreement will set out the rules by which the shareholders deal with each other and with the corporation.

This might include provisions regarding the amount of work that each party puts in, the amount of money that each party must invest in development, how profits are distributed, and often most importantly; how do the shareholders go their separate ways, and what happens to the domain name(s) and websites, if that happens.

Often there will be a right of first refusal and a shotgun clause in place, so that there are clearly defined ways of breaking out of the joint venture, or alternatively, clearly designed parameters for how a sale of the domain name and/or website is to take place, and who gets what share of the proceeds and when.

Furthermore, particular issues as to ownership of copyright, trademarks, mailing lists, user databases, etc., all have to be considered when creating an appropriate shareholder agreement for the joint venture company.

Conclusions

Domain name development joint ventures can be a very effective way of developing and monetizing a domain name however these arrangements are typically complex and usually require a sound structure and the assistance of a domain name lawyer who is experienced in Internet-based joint venture agreements.




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