Shared Earnings Agreement

Earnest is an early-stage investor in technology and technology-enabled companies. We invest via a very different structure than traditional VCs or accelerators. Earnest is a team of founders, bootstrappers, Indiehackers, and makers focused on funding founders who want to build sustainable, profitable businesses. We developed the Earnest Shared Earnings Agreement as the investing structure we wanted to see when we were building our businesses.

 

 

Key attributes of a Shared Earnings Agreement

 
  • We invest upfront capital at the early-stage of businesses. Typically (but not always) after a product has launched, but before the founders go full-time.
  • We agree on a Return Cap which is a multiple of the initial investment (typically 3-5x)
  • We don’t have any equity or control over the business. No board seats either. You run your business as you see fit.
  • As your business grows we calculate what we call “Founder Earnings” and Earnest is paid a percentage. Essentially we get paid when you and your co-founder get paid.
  • Founder Earnings = Net Income + any amount of founders’ salaries over a certain threshold. If you want to eat ramen, pay yourselves a small salary, and reinvest every dollar into growth, we don’t get a penny and that’s okay. We get earnings when you do.
  • Unlike traditional equity, our share of earnings is not perpetual. Once we hit the Return Cap, payments to Earnest end.
  • In most cases, we’ll agree on a long-term residual stake for Earnest if you ever sell the company or raise more financing. We want to be on your team for the long-term, but don’t want to provide any pressure to “exit.”
  • If you decide you want to raise VC or other forms of financing, or you get an amazing offer to sell the company, that’s totally fine. The SEA includes provisions for our investment to convert to equity alongside the new investors or acquirers.

Why use a Shared Earnings Agreement

 
  • An SEA aligns incentives of both founder and investor to build a healthy profitable business that goes the distance. If you want to build the next Basecamp, Buffer, Wistia or Wildbit or a $25m/year profitable, growing, calm business with happy customers and healthy employees, an SEA makes that a success for founder and investor.
  • An SEA creates zero pressure for founders to raise further rounds of financing or sell the business, while also keeping those options on the table if the founder chooses.
  • Explicitly acknowledge that founders and employees have a livelihood, family obligations and a life outside of their business. This is business, we’re investing and need to earn a return, but we believe that stress, burn out and overwork are more likely to kill your startup than not having your customer acquisition funnel fully optimized.
  • We hope it provides clear intuitive terms that maximize options for the founder. We want to avoid perverse incentives for founders to make any weird decisions because a poorly thought out investment structure incentivizes them to do something that isn’t what they determine is best for the business and team.
  • Sometimes at the early stage of the business, you don’t know if you want to build a billion-dollar rocket ship, a world-class company that dominates a niche, or an amazing lifestyle business—an SEA leaves all options on the table while providing smooth transitions if the plans change.

Further Reading