One of the most common questions we get about our Shared Earnings Agreement terms is “what’s the deal with the Founder Earnings Threshold?”
To address the most common misconception first: it is not a salary cap. As the founder(s) of your business you have full control over setting your own salary.
With that aside, let’s dig in a little deeper. First, remember that the entire point of the SEAL is to align us as the investors with founders who want to run a profitable, sustainable business. A common source of mis-alignment is that founders can pay themselves a salary or dividends or hold cash in the business (retained earnings) and pay themselves salary/dividends out of that any time they want… while preferred equity investors only get a share of dividends. This works reasonably well for large publicly traded companies, but in private profitable companies, things get out of whack very easily.
The primary way we recoup our investment is by sharing in a percentage of Founder Earnings. Founder Earnings are broadly defined as the economic value that goes to the founders (in the form of salary, dividends, retained earnings, etc). Basically, we earn a piece of whatever the founders earn, kind of like a small non-controlling co-founder.
So why don’t we just have a flat arrangement that we get XX% of Founder Earnings?
We invest very early in companies and if the business is only generating $30k in Founder Earnings we don’t want to start taking our percentage and cutting in on the minimal earnings of the business. So we set a threshold, and our percentage only kicks in on the amount above that limit. We know you need to live off what your business earns and the threshold is protection for the founder in the early years of the business.
Two important clarifications in how the salary threshold affects Founder Earnings (both of which we hope you’ll agree are the most founder-friendly ways to interpret things):