# SEA-Description

> The following is an adapted description from [Earnest Capital](https://earnestcapital.com/) at the following [**link**](https://earnestcapital.com/shared-earnings-agreement/)
>
> ## Key attributes of a Shared Earnings Agreement

* Investor invests upfront capital at the early-stage of businesses. Typically (but not always) after a product has launched, but before the founders go full-time.
* Investor agrees on a Return Cap which is a multiple of the initial investment (typically 3-5x)
* Investor doesn'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, Investor calculates what is called “Founder Earnings” and Investor is paid a percentage. Essentially Investor gets 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, Investor doesn’t get a penny and that’s okay. Investor gets earnings when you do.
* Unlike traditional equity, Investor's share of earnings is not perpetual. Once Investor hits the Return Cap, payments to Investor end.
* In most cases, Investor will agree on a long-term residual stake for Investor if you ever sell the company or raise more financing.&#x20;
* 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 the investment to convert to equity alongside the new investors or acquirers.

## Why use a Shared Earnings Agreement

* An SEA can better align incentives of both founder and investor to build a healthy profitable business that goes the distance.&#x20;
* 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.&#x20;
* Earnest Capital ("EC," creator of SEA) hopes it provides clear intuitive terms that maximize options for the founder. EC wants 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.
