Hi all, I'm the GP of Earnest Capital and I'll add here the comments I gave to Matt privately before this post. The terms we use for our Shared Earnings Agreement are the result of a transparent and honest discussion with the community via this post (https://earnestcapital.com/funding-for-bootstrappers/). I received 100s of comments about our investments structure from founders and investors, 99% of which were along the lines of "how will you build a successful fund with such founder-friendly terms."
A Shared Earnings Agreement is not debt and comparisons based on interest rates are academically interesting, but misleading because you cannot go to any debt lender with a side project with $2k MRR and get a loan to take a year and grow it. A SEAL has no fixed repayment schedule, no personal guarantee, no mechanism to foreclose on the business if it fails, and critically and unlike any form of debt the investor only gets paid when the business is doing well (repayment is a % of the economic benefit the founders choose to pay themselves: Founder Earnings).
We designed it to be a substitute for equity (where seed VC is really the only real alternative most founders at our stage would have) but equity that doesn't force the company to continually raise capital or sell the business. A SEAL can still have a successful risk-adjusted outcome for the investor even if you build a nice profitable business (literally the "nice Italian restaurant" example quoted from DHH in the post).
You may as well also include the effective interest rate on every VC investment that returns 50x or 100x their investment and say "Woah what a high interest rate. Should have used a credit card." Like equity, the implied "interest rate" on a SEAL looks higher in scenarios where the business & founders are more successful (thus paying back more Founder Earnings faster) and is a nice, low 0% APR if the business fails
> You may as well also include the effective interest rate on every VC investment that returns 50x or 100x their investment and say "Woah what a high interest rate. Should have used a credit card." Yeah,
This. The author seems to completely miscomprehend/discount the risk involved for both parties in his calculations.
It's important to remember that the payback is based on profit, not revenue. The author does note this, but a lot of his reasoning around the founders' hypothetical motivations only make sense if you assume the reverse is true.
For example:
> While much shorter than a mortgage, eight years can feel like a long time to owe money, especially in startup land, where 1 year can feel like a decade.
This misses the point because you don't really owe money like a mortgage. With a mortgage if you don't pay it off today, lose your job and can't make future repayments, you could lose your house.
With this SEAL, if you don't pay back the investors today and suddenly can't afford to pay anything next month, there are no negative consequences. You won't be fired, lose your house/additional equity or end up paying back more (eg due to interest).
I would encourage folks who are interested to read the very good discussion: Here on HN: https://news.ycombinator.com/item?id=18338665 On Indiehackers: https://www.indiehackers.com/forum/help-us-design-funding-fo... And directly in the term sheet draft that we posted with comments open on Google Docs: https://docs.google.com/document/d/1HoZ94eWTctYQM5O5RXDeQQ_h...
A Shared Earnings Agreement is not debt and comparisons based on interest rates are academically interesting, but misleading because you cannot go to any debt lender with a side project with $2k MRR and get a loan to take a year and grow it. A SEAL has no fixed repayment schedule, no personal guarantee, no mechanism to foreclose on the business if it fails, and critically and unlike any form of debt the investor only gets paid when the business is doing well (repayment is a % of the economic benefit the founders choose to pay themselves: Founder Earnings).
We designed it to be a substitute for equity (where seed VC is really the only real alternative most founders at our stage would have) but equity that doesn't force the company to continually raise capital or sell the business. A SEAL can still have a successful risk-adjusted outcome for the investor even if you build a nice profitable business (literally the "nice Italian restaurant" example quoted from DHH in the post).
You may as well also include the effective interest rate on every VC investment that returns 50x or 100x their investment and say "Woah what a high interest rate. Should have used a credit card." Like equity, the implied "interest rate" on a SEAL looks higher in scenarios where the business & founders are more successful (thus paying back more Founder Earnings faster) and is a nice, low 0% APR if the business fails
That said, if anyone has constructive feedback to share I would love to hear it: https://earnestcapital.com/contact/