Earnest Capital is live
In principle this seems pretty cool, but the gap between what&#x27;s communicated on the website, and what&#x27;s actually contained in the &#x27;Shared Earning Agreement&#x27; [1] makes me concerned this might be good marketing on a fundamentally predatory investment agreement. This could very well be a completely unintentional idiosyncrasy, so I don&#x27;t want to be too accusatory, but the implication of the terms needs to be laid out more clearly on the website, if this is simply an oversight.<p>The single biggest red-flag is the fact that the equity stake vests in company sale or priced-raise as unpaid return cap (a multiple of 3-5X investment) over valuation cap. What this essentially means, is that in the scenario that you raise more money or sell the company before you&#x27;ve paid off the 3-5x multiple of the investment, then the investment essentially vests as if the valuation cap was 3-5x lower than what it was actually set at.<p>This probably seems abstract, so I&#x27;ll make it vividly clear with an example. Let&#x27;s say you raise $200k on a $2 million valuation with a 5x return cap on an SEA. Business goes well, a year or two goes by, and you either sell the company or raise more capital at a $10 million valuation, having in the interim say paid off $200k of the agreement from earnings. With 4x still outstanding. Suddenly, likely to your surprise, that $800k (4x investment amount) vests into equity—at the $2 million cap from the original agreement. In other words, Earnest Capital suddenly, to your surprise, owns 40% of your company. If you hadn&#x27;t monetized at all and paid any off, this could be a full 50% stake.<p>Even if you run the numbers with the more conservative numbers in their document—is it clear to people that a $150k investment at a &quot;$3 million&quot; valuation could convert to a 15% equity stake in your company?<p>I&#x27;d love to see how this could be revised to address this issue, and I&#x27;d love to see the website more clearly communicate the equity implications. As of now, I can&#x27;t help but feel that this is double-dipping, predatory investing, that is getting heaps of praise on HN due to clever marketing around tapping into the trend of anti-VC and indie-hacking, that will ultimately lead to some very frustrating experiences for first-time entrepreneurs that didn&#x27;t fully comprehend the terms they were agreeing to.<p>Tyler—please prove me wrong and fix this thing. Or, since IANAL I may have completely misunderstood the document, in which case—screw me, my apologies—but please explain how it actually works :)<p>[1] <a href="https:&#x2F;&#x2F;docs.google.com&#x2F;document&#x2F;d&#x2F;1MoLiH_VnhX-0vfZ1zgMSfpcIt0rdyD9rc27BbypplDI&#x2F;" rel="nofollow">https:&#x2F;&#x2F;docs.google.com&#x2F;document&#x2F;d&#x2F;1MoLiH_VnhX-0vfZ1zgMSfpcI...</a>