Plaintiffs allege company withheld payments from 2008 acquisition.
Internet Brands, Inc., which owns Autos.com and Loan.com, has been sued (pdf) by two people who sold the web site ModelMayhem.com to it in 2008. Although Internet Brands has not yet responded to the suit, it’s a reminder of the challenges of selling domain names or web sites with “earnout” or residual terms on future revenue or traffic.
Donald and Tyler Waitt sold their popular Model Mayhem web site to Internet Brands in 2008. As part of the agreement, Internet Brands was to pay them a deferred amount based on 2009 traffic to the ModelMayhem.com web site. If the average monthly page views for 2009 were at least 350 million, the pair would be paid $800,000. The deferred payment scaled down from there so long as the site average 225 million page views per month. The page views were to be based on stats from Google Analytics, according to the suit.
Near the end of 2009 the plaintiffs allege that “Defendant unreasonably and without proper cause unilaterally changed the method of calculating page views”. Apparently Internet Brands is disputing some of the traffic being counted by Google Analytics.
What actually happened? We won’t know until we hear both sides of the story, and the case perhaps works its way through the courts. But it’s an example of an earnout provision clearly gone awry — and something to think about before entering into such an agreement.