After explaining Shared Earnings Agreements to literally 1,000s of founders and investors, we’ve made a few clarifying changes.
The main Shared Earnings Agreement page has been substantially updated.
“Return Cap” has been changed to “Shared Earnings Cap” to clarify that a) the cap, as a multiple of initial investment, only applies to Shared Earnings and not proceeds from any sale of a business (which has a defined % of the sale but no cap on total amount of dollars if the sale is large enough) and b) to make a SEAL more clearly differentiated from truly “capped return” products like debt or revenue-based financing.
“Founder Salary Threshold” has been changed to “Founder Earnings Threshold” because too many people were confusing this with a salary cap. The whole point of defining Founder Earnings to make the demarcation between founder salary, dividends and retained earnings irrelevant to investors, so that founders set their salary based on rational reasons like their cost of living and advice from their accountant.
The Sale and Equity Conversion language have been edited for clarity to more accurately reflect the calculations we articulated here.
We have removed default values from the public term sheet and left the key numbers as blanks. At Earnest Capital we are investing in companies at a wide range of stages and maturity. Too many people were mistakenly assuming the default values, initially added only to help with understanding the structure of the agreement, were our non-negotiable standard terms.