You should never spend $825K on a domain — but here’s why I’m glad I did

It was one of the more unusual phone calls I’ve ever received.

“If you want this to get done, you need to wire $825,000 to this Escrow account — and it needs to get done today.”

A lot of people, at that moment in time, would have said that what I did next was really dumb.

It actually went against everything my co-founders and I had learned at Y Combinator, including: Don’t spend money on frivolous things.

After all, this was enough money to get a weighty celebrity endorsement. This was Steph Curry money.

A few Slack messages later, the four of us had made up our minds. We were going for it.

Spending that money to purchase the domain Cover.com wasn’t just the biggest single purchase we’ve made as a company, but it was among the highest figures paid for a domain that year.

But this wasn’t an impulsive decision. It was very calculated and thought-through over the course of the prior couple of months.

In retrospect, it proved to be an excellent move for us — but one I would strongly caution other founders against, for reasons that I hope will become clear.

The path of least resistance

To back up a little. Cover had just raised our Series A and we were trying to decide whether or not we should rebrand, or if we would completely own Cover as a word and as an insurance brand.

We initially chose ‘Cover’ back when we built a prototype of the app, and the conversation lasted maybe less than five minutes.

Cover just made sense. There is probably no better name to build a brand on in insurtech. You see companies using every permutation of the word, so why not own the word outright?

Sure, we would save money buying the dotcom domain for an alternative brand, but we also saw the long-term value of owning one of the most coveted domains in insurance. This struck us as the bigger opportunity.

We realized that despite all the obstacles — and costs — involved with committing to Cover as our brand, it was that the path of least resistance.

Initial fishing

With the decision agreed upon, I filed a trademark with the United States TPO for Cover. I then started fishing around for the social media handles and I did some background research on who we would need to buy Cover.com from.

I quickly determined that the owners had effectively built an entire business on acquiring these one-word domains, like Cover.com or Box.com. They either developed the properties or sold them to companies who were intending to build a brand around them.

That didn’t put us in a very strong negotiating position. Cover.com wasn’t exactly a domain that, if we’re being objective about it, the owners really needed to sell.

To get a sense of the price, I solicited a bunch of insurance domain brokers with mixed results. Some were actually quite professional, but others were super shady.

Ultimately, after talking to a handful of these folks, the initial guesstimate for what the domain would cost was anywhere between $1.5 million to $2 million. On top of that, they would charge a customary 10 percent broker fee, which is insane.

Clearly, it wasn’t really something we could afford. To find an alternative solution, we talked to our investors and thankfully, they were able to introduce us to folks they had used before who could do the backchanneling for us.

Striking the deal

From my understanding, what these intermediaries did was provision the services of another broker to obfuscate the relationship between the seller and us even further. We effectively proxied through two brokers to communicate with the seller.

We opened with a bid of $250,000 (which is still a crazy amount of money for a domain) and they just came back laughing at us. They counter-offered with $1.5 million and then $1 million, but it was still more than we were prepared to pay.

After a period of radio silence, we finally got the call proposing the price we would ultimately settle on. We would pay $750,000 plus commission between the two brokers, adding about $75,000.

A little nauseous, we wired the money then crossed our fingers. Less than 24 hours later the domain was ours — and with it a feeling of mixed relief, excitement, and the need for a stiff drink.

All told, agreeing on a price took about a month of back and forth, but we were finally in a position to build our company and our brand.

Investing in trust

Fast forward one year and Cover has scaled significantly and recently closed our Series B funding round. Each week that passes only further vindicates our decision to commit to the brand name.

We sell an intangible product and at the end of the day, we’re in the trust business. Owning Cover.com has lent an extra level of legitimacy to the brand and this, in turn, has translated into sales.

We have seen firsthand how it helps get people over the hump when it comes to investing their money with us. Immediately after moving to Cover.com we saw our conversions rise, largely because customers would cross-reference our app on the internet before they made the purchase decision.

Not for everyone

Clearly, for us, it was worth it. That said, this isn’t a course of action I’d recommend to other startups. We found ourselves in a relatively unique situation that most tech companies don’t find themselves in.

This is the most important lesson for other founders to glean from our experience. We didn’t buy the domain just because we were married to the name and refused to change.

The importance of the domain to our industry meant there was a clear financial and strategic merit to the purchase. This is what decisions about your domain and your brand should be based on.

If you’re early stage and you’re just trying to figure it out, you don’t need to spend on an expensive domain. It’s a lot of money and, at that stage, you have the freedom to rebrand instead.

What we did might seem contrary to the Y Combinator ethos which emphasizes not spending money on frivolous things. But in my mind, for Cover, it wasn’t a frivolous thing. It has become an important and valuable asset in the context of our business.

Right off the bat, it felt like a shrewd investment. I knew that, in the right hands, the value of Cover.com would become exponentially more valuable. This is exactly what we’ve seen as we have used it as a platform upon which to build an insurance business.

Written by Karn Saroya, Cover CEO & co-founder.

Originally posted on Entrepreneur’s Handbook.