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The Shared Earnings Agreement (SEA) is an innovative financing instrument created by Earnest Capital that provides an alternative to traditional venture capital for founders building sustainable, profitable businesses.
A Shared Earnings Agreement is not debt and not equity. It’s a revenue-sharing agreement where investors receive a percentage of founder earnings until reaching a predetermined return cap.

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What is a Shared Earnings Agreement?

Unlike traditional VC that requires massive exits, SEAs align investors with founders building profitable, sustainable businesses.

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Core mechanics

1

Investor provides upfront capital

The investor makes an upfront investment, typically:
  • After product launch but before full-time
  • 50K−50K - 500K range
  • Funds used for growth and founder salaries
Example: Investor provides $200,000 to help founders go full-time and hire first employees.
2

Company pays percentage of Founder Earnings

Each quarter, the company pays the investor a percentage of “Founder Earnings”:Founder Earnings = Net Income + (Founder Salaries above threshold)Example:
  • Net Income: $40,000
  • Founders each take 50,000salary(2founders=50,000 salary (2 founders = 100,000 total)
  • Agreed founder salary threshold: $80,000 total
  • Excess salary: $20,000
  • Founder Earnings: 40,000+40,000 + 20,000 = $60,000
  • If investor percentage is 30%: Payment = 60,000×3060,000 × 30% = 18,000
If you pay yourselves minimal salaries and reinvest everything in growth, the investor gets minimal payments. You control your own destiny.
3

Payments continue until Return Cap is reached

The investor receives payments until they’ve been paid back:Return Cap = Investment × Multiple (typically 3-5x)Example:
  • Investment: $200,000
  • Return Cap: 3x = $600,000
  • Investor receives quarterly payments until cumulative total = $600,000
  • After $600,000 paid, investor receives no more payments
Unlike equity, investor’s share of earnings is not perpetual. It ends at the cap.
4

Investor retains small residual stake

Even after reaching the return cap, investor typically retains:
  • Small equity stake (2-5% of company)
  • Only matters if you sell company or raise VC later
  • Keeps investor aligned with your long-term success
Example:
  • After return cap met, investor retains 3% equity
  • If you later sell company for 20M,investorreceives320M, investor receives 3% × 20M = $600,000
  • This is in addition to the $600,000 already received via payments

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Why SEAs exist

Earnest Capital created SEAs to address a fundamental problem: not every business should be a venture-backed rocket ship.
Traditional VC misalignment:
  • VCs need 100x returns on some investments
  • Push for hyper-growth and massive exits
  • Binary outcomes: home run or strikeout
  • Sustainable, profitable businesses don’t work for their model
SEA alignment:
  • Investor succeeds when founders succeed
  • Pays back from founder earnings (not revenue)
  • Rewards profitability over growth-at-all-costs
  • Founders can build sustainably
With an SEA, if you build a profitable 5M/yearbusinessandtakehome5M/year business and take home 1M/year in founder earnings, everyone wins. Traditional VC would consider this a failure.
Traditional VC pressure:
  • Must raise Series A, B, C to avoid dilution
  • Pushed to sell even if you don’t want to
  • Board may force sale for liquidity
  • Lost control of your company
SEA flexibility:
  • No pressure to raise more capital
  • Can stay private forever
  • Can sell if you want, but not required
  • Options remain on the table
SEAs let you choose: build a sustainable business you run forever, or raise VC and go big, or sell when it makes sense. You’re not locked into any particular path.
Traditional VC approach:
  • Founders should take minimal salaries
  • Prove dedication by financial sacrifice
  • Personal finances suffer for years
  • Sustainable only for wealthy or young founders
SEA approach:
  • Founders have families, mortgages, lives
  • Reasonable salary is expected and normal
  • Investor only shares in excess above threshold
  • Sustainable for diverse founders
As Earnest Capital says: “Explicitly acknowledge that founders and employees have a livelihood, family obligations and a life outside of their business.”
SEAs don’t force any particular outcome:✓ Want to build a lifestyle business? Great. ✓ Want to raise VC later? SEA converts to equity. ✓ Want to sell the company? SEA has liquidity provisions. ✓ Want to stay private forever? Totally fine.Conversion provisions: If you raise traditional VC or sell the company:
  • SEA converts to equity at a valuation cap
  • Investor participates in new round or sale
  • Smooth transition to traditional structure
You’re not locked into any particular path. The business evolves as it should.

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Key SEA terms

Understanding each component helps you evaluate whether an SEA makes sense for your business.
The base for calculating investor paymentsFormula:
Founder Earnings = Net Income + Excess Founder Salaries

Where:
- Net Income = Revenue minus all expenses (GAAP)
- Excess Founder Salaries = Total founder salaries
  minus agreed threshold
Example calculation:Quarter 1:
  • Revenue: $200,000
  • Expenses (excluding founder salaries): $120,000
  • Founder salaries: 40,000(2founders×40,000 (2 founders × 20,000)
  • Net Income: 200,000−200,000 - 120,000 - 40,000=40,000 = 40,000
Founder Earnings calculation:
  • Agreed salary threshold: $30,000/quarter
  • Actual founder salaries: $40,000
  • Excess salaries: $10,000
  • Net Income: $40,000
  • Founder Earnings: 40,000+40,000 + 10,000 = $50,000
If investor percentage is 30%: Payment to investor: 50,000×3050,000 × 30% = 15,000
If Founder Earnings are negative (loss), no payment is due. Investors only get paid when you’re making money.

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SEA terms summary document

The Shared Earnings Agreement term sheet is simpler than traditional VC term sheets.

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Standard provisions

TermDescription
Amount of InvestmentTotal capital provided by investor
The PercentageInvestor’s share of quarterly Founder Earnings
Return CapMultiple of investment (typically 3-5x)
Valuation CapCap for equity conversion scenarios
Shared EarningsQuarterly payments of Percentage × Founder Earnings
Payment timingBy 10th day of each quarter for prior quarter
Net Income:
  • Calculated per GAAP (Generally Accepted Accounting Principles)
  • Revenue minus all expenses
  • Standard accounting definition
Founder Earnings:
  • Net Income, PLUS
  • Founders’ salaries above agreed threshold
  • This is the key innovation of SEAs
Example threshold: “Founder Earnings means Net Income, adding back any founders’ salaries above $100,000 annually per founder.”
Negotiate the founder salary threshold carefully. It should be enough for you to live reasonably, but not excessive. Typical range: 75K−75K - 150K per founder depending on location.
Information Rights:
  • Standard quarterly financial reporting
  • Access to accounting records to verify calculations
  • Transparency ensures trust
Board Observer:
  • Investor may attend board meetings as observer
  • Upon request
  • Subject to confidentiality agreement
  • Non-voting participation
Participation Rights:
  • Pro rata rights in future equity issuances
  • Allows investor to maintain ownership percentage
  • Standard exclusions apply
SEAs typically include lighter investor rights than traditional VC. No board seat, just observer rights.
Binding provision:Without investor consent, company will not disclose terms to:
  • Other investors
  • Press or public
  • Anyone except:
    • Officers and directors
    • Key service providers (lawyers, accountants)
    • Other investors in the same round
This is typically a binding part of the term sheet.

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When to use an SEA

SEAs work well for specific types of businesses and founders. Evaluate fit carefully.
✓ Perfect for:1. Bootstrapped SaaS companies
  • Monthly/annual recurring revenue
  • Path to profitability visible
  • Don’t need massive VC rounds
  • Want to stay independent
Example: B2B SaaS with $30K MRR, growing 10-15% monthly, approaching profitability2. Service businesses with products
  • Consulting + software
  • Agency + platform
  • Services generating cash, product needs investment
Example: Development agency launching a SaaS product for their vertical3. Marketplace businesses
  • Path to profitability clear
  • Network effects but not requiring “blitzscaling”
  • Can grow sustainably
Example: Niche marketplace for professional services4. Content/media businesses
  • Subscription or advertising revenue
  • Audience growth is steady
  • Not requiring massive investment
Example: Newsletter business with premium subscriptions
The common thread: businesses that can reach profitability with moderate investment and grow sustainably without requiring massive VC rounds.

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Modeling an SEA

Before accepting SEA terms, model how payments will work under different scenarios.

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Financial projection model

1

Build base case financial projections

Project quarterly for 5-8 years:
  • Revenue growth
  • Operating expenses
  • Net income
  • Founder salaries
Example:
Year 1: $500K revenue, ($100K) net income, 2 founders @ $50K each
Year 2: $1.2M revenue, $100K net income, 2 founders @ $75K each
Year 3: $2.5M revenue, $400K net income, 2 founders @ $100K each
Year 4: $4M revenue, $800K net income, 2 founders @ $120K each
Year 5: $6M revenue, $1.5M net income, 2 founders @ $150K each
2

Calculate quarterly Founder Earnings

For each quarter:
  • Net Income
  • Plus: Founder salaries above threshold
  • Equals: Founder Earnings
Year 3 example:
  • Annual Net Income: 400K=400K = 100K/quarter
  • Annual Founder Salaries: 200K=200K = 50K/quarter
  • Salary threshold: $30K/quarter
  • Excess: $20K/quarter
  • Founder Earnings: 100K+100K + 20K = $120K/quarter
3

Calculate investor payments

Quarterly payment = Founder Earnings × PercentageTrack cumulative payments toward Return Cap.Example with 30% share:
  • Q1: 120K×30120K × 30% = 36K
  • Q2: 120K×30120K × 30% = 36K
  • Q3: 120K×30120K × 30% = 36K
  • Q4: 120K×30120K × 30% = 36K
  • Year 3 total: $144K
Cumulative:
  • Year 1: $0 (company not profitable)
  • Year 2: $40K
  • Year 3: $144K
  • Total so far: 184Ktoward184K toward 600K cap
  • Remaining: $416K
4

Determine time to reach Return Cap

Calculate when cumulative payments = Return CapIn our example:
  • Return Cap: 600K(3xon600K (3x on 200K investment)
  • Current trajectory: ~$150K-200K/year in payments
  • Time to cap: ~4-5 years from profitability
This tells you how long until you’re free of payments.
5

Calculate founder take-home

What founders actually keep:Founder Take-Home = Founder Earnings - Investor PaymentYear 3 example:
  • Founder Earnings: $480K/year
  • Investor payment: $144K/year (30%)
  • Founders keep: $336K/year
  • Split between 2 founders: $168K each
Compare to alternative where founders took VC equity and got diluted 20-40%.

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SEA calculator

Earnest Capital provides a SEAL Calculator spreadsheet to model different scenarios. Use it!
Key variables to test:
  • Different growth rates (optimistic, base, pessimistic)
  • Different percentage shares (25%, 30%, 35%)
  • Different return cap multiples (3x, 4x, 5x)
  • Different salary thresholds
Questions to answer:
  • How long until return cap is reached?
  • How much do founders take home each year?
  • What happens if growth is slower than expected?
  • What happens if growth is faster than expected?
  • Is this better than taking VC equity?

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Comparing SEAs to alternatives

AspectSEATraditional VC
DilutionSmall residual equity (2-5%)Significant (15-25% per round)
ControlFounders retain controlBoard seats, voting rights
Pressure to exitNoneHigh - must exit for returns
Founder salaryEncouraged (above threshold shared)Discouraged - take less to show commitment
Capital available50K−50K-500K typically500K−500K-50M+
Path dependencyFlexible - can pivot to VC laterLocked in - must pursue exits
Investor expectation3-5x return10-100x return on winners
Success definitionProfitable, sustainableMassive exit ($100M+)
Best forSustainable businessesHyper-growth businesses

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SEA best practices

1

Negotiate founder salary threshold carefully

The threshold is critical:Too low: You can’t pay yourself reasonably Too high: Investor never shares in excess salaries Just right: Reasonable living wage + investor shares in successConsider:
  • Your location’s cost of living
  • Your family situation
  • Typical salaries for your roles
  • Be honest about what you need
Typical thresholds: 75K−75K-150K per founder annually, depending on location.
2

Model multiple scenarios

Don’t just model your best-case scenario.Build three scenarios:
  • Pessimistic: Slow growth, takes longer to reach cap
  • Base case: Realistic expectations
  • Optimistic: Fast growth, reach cap quickly
Ensure you can live with the pessimistic case.
3

Understand conversion provisions

Make sure you understand:
  • How SEA converts if you raise VC later
  • What investor receives if you sell company
  • How valuation cap affects conversion
  • What happens to payments after conversion
Get your lawyer to explain these thoroughly.
4

Maintain excellent financial records

SEA payments depend on accurate financials:
  • Use proper accounting software (QuickBooks, Xero)
  • Follow GAAP for Net Income calculation
  • Track founder salaries carefully
  • Calculate quarterly payments on time
  • Document everything for potential audits
Use a good accountant or CFO to ensure your Net Income calculations are accurate and consistent.
5

Communicate with your investor

Even though information rights are lighter than VC:
  • Send quarterly updates proactively
  • Explain financial results
  • Discuss strategic decisions
  • Build trust and partnership
Your SEA investor is a long-term partner. Keep them engaged.
6

Plan for multiple scenarios

Don’t assume one path:
  • Maybe you bootstrap to profitability and pay out the cap
  • Maybe you raise VC later and SEA converts
  • Maybe you get acquired and SEA participates
  • Maybe business evolves in unexpected ways
SEAs give you flexibility. Take advantage of it.

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Resources and templates

Earnest Capital SEA resources

Complete SEA description and philosophy from Earnest Capital

SEA template (OpenLaw)

Interactive SEA template on OpenLaw platform

SEAL Calculator

Spreadsheet to model SEA payments and scenarios

Earnest Capital application

Apply for funding from Earnest Capital
Earnest Capital pioneered SEAs and remains the primary investor using this structure. While the concept is open-source, few other investors have adopted SEAs at scale.

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Next steps

Compare to SAFE

Understand how SEAs differ from Y Combinator SAFEs

Compare to convertible notes

See how SEAs compare to traditional convertible debt

Equity financing

Learn about traditional equity financing if SEAs aren’t right for you

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