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.
David J Castello says
Very interesting situation. Two things jumped out at me right away:
1) The deal was negotiated and signed in early 2008 – right before the economy went off a cliff.
2) It appears that Internet Brands was to pay out yearly. If true – bad move. I would have insisted on quarterly payments. If something this creative is going to go wrong you need to know about it and nip it in the bud ASAP.
Josh says
Sounds to me as if they always planned to challenge the calculations, cheaper perhaps to fight and settle. hhhmmm
M. Menius says
Sounds like some complicated math was employed and subject to change based on some poorly defined variables. What a shame for a proven asset to get tied up in litigation. Get the money up front, go with a simple clean cut deal … and walk away!
Gerald Smitty says
Interesting details on the lawsuit here.
Read more: http://blog.patyuen.com/2010/05/12/tyler-waitt-former-owner-of-model-mayhem-files-lawsuit-against-internet-brands/
BB says
Is Internet Brands a fair company? They offered to buy my site(s) as well.
Shelby says
Internet Brands is a very shady company. They are known for lying about their page views and they use ad support (pop ups) to drive traffic to their sites.
Jeff Schneider says
Hello Andrew,
Although your good intentioned advice seems to be avoid earnout provisions, this would not be an excuse to completely abandon the whole concept. As David above suggests there are all types of clauses and addendums to ptotect this very lucrative practice.
Gratefully,
Jeff
Andrew Allemann says
@ Jeff – I wouldn’t avoid earnout clauses; just be aware of problems like this.
Shuwix says
Read carefully before signing. That’s only working rule.
Mark says
What does Shelby mean by “they use ad support (pop ups) to drive traffic to their sites”? Also, can you elaborate on “Internet Brands is a very shady company”? Why do you believe this to be the case??
Pat Yuen says
I was a member of Model Mayhem since 2006 when it was still relatively small. Went through all their growing pains and did my part to grow that community. The sale of the site was inevitable. It grew beyond Tyler’s ability to manage it. Internet Brands was a good fit. They brought a lot of resources to the table. Things improved slowly and I often questioned their management’s competence as they often acted more like two guys in a garage more than a multi-million dollar publicly traded corporation. For example, their beta testing consist of asking people in a forum to check out a beta site. There is no formal beta test reporting. For all they know, the test could have been done by 5 people running Windows 2000 with IE6. They don’t have a site status page despite frequent site crashes. I finally irritated them enough last year that they created a Twitter and Facebook page but those are rarely if ever used to update status.
As for the suit, we only know one side of the story but the dispute is not over how to count or a few thousand page views. It’s over 173 million page views per month. I don’t think it has anything to do with the economy. Model Mayhem either have the page views or they don’t. Page views is not secret sauce. There are many ways to confirm it. It’ll be interesting to see what IB files as a defense.
I disagree that IB is a shady company; whatever that means. They have good intentions as far as Model Mayhem is concern. Some might question their commitment.
In the end, I think it will get settled. As for Model Mayhem, IB needs to rely less on their number one position. They are at risk of becoming the Friendster of the internet modeling space.