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Comment by jedberg | Hacker News Reader

So is Earnest Capital more of a charity than a profit making enterprise? I really like what you are doing, serving the vast majority of businesses that don't want to be hyper growth.

But for the math to work out, with a 3x cap on earnings, you need 33% of the businesses to be successful just to get your money back. At 5x you still need 20%. And that is over however long it takes for those companies to reach payback, which could be measured in decades for some of the companies.

I think it's really altruistic, but I'm not sure how big this market segment could actually get.

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I'm not OP, but it's worth mentioning that Earnest starts to recoup its investment as soon as founders take a salary. Its calculator [0] shows a percentage of 30% by default - if that's accurate, for the 67%-80% of companies that fail, Earnest would still recoup 30% of its investment (ignoring other expenses and time value of money) even if those companies never saw a penny of revenue.

Also, they list a starting point of $2k-$5k in MRR, and on a $150k investment with a 30% split, they break even as soon as the founder(s) have taken $350k in total salary (again ignoring time value of money), including any salary paid out of the original $150k investment. I don't want to trivialize the process of scaling a startup beyond $2k-$5k of MRR, but I bet more than 20% of companies with $2k-$5k of MRR are capable of reaching that point.

[0] https://docs.google.com/spreadsheets/d/1h_L7oa3rbV8P-ZnMM-l1...

edited for clarity

> Earnest would still recoup 30% of its investment (ignoring other expenses and time value of money) even if those companies never saw a penny of revenue.

How so? Who's paying that 30% if you have zero revenue?...did you mean "if those companies never saw a penny of profit"?

Based on my reading of their terms, it seems like they get back 30% of their own investment if the rest is entirely used to pay founders' salaries. So on a $150k investment, they have potential upside of $300k to $600k after they recoup their initial investment, while they can lose at most ~$105k when investing in businesses that have low expenses outside of founders' salaries.

We also have a residual, uncapped, % option if the founder ever sells the business. This keeps us aligned with the founders to keep helping them grow the value of the business for the long-term even after the Return Cap is paid back.

> I'm not sure how big this market segment could actually get.

Keep following along and see :)

> We also have a residual, uncapped, % option if the founder ever sells the business.

What exactly is a "residual stake"? In your spreadsheet this is set as 9.5%...where did that come from? Is this is a stock option, convertible note, or equity position?

It sounds to me like a critically important part of their model that they don't want you to understand or think about. There's nothing about it on their site from what I saw.

The residual stake is a factor of the investment amount, the Valuation Cap (negotiated at time of investment) and the terms of a sale. Note by "stake" we just mean an option to participate in a sale. You can run the business profitably forever without paying us a penny. There is a screencast here going over every term and a spreadsheet anybody can use to run the numbers. Not hiding anything :) https://earnestcapital.com/shared-earnings-agreement-digging...

> we just mean an option to participate in a sale

By what instrument though? Are you offering a stock option at a strike price? Is it equity at a priced round? Or is a convertible note? Other? You can just say "if you sell we have the option to take a %"...

It's not set at 9.5%. Not sure where that number is coming from. Check out https://earnestcapital.com/shared-earnings-agreement-digging...

Cell B88.

That is a tool for calculating the % of a sale that would go to Earnest depending on which year you sell the business in. It is set at year 6 in the default setting for the tool. Earnest's % of a sale goes down as Shared Earnings payments are paid back to us. In the base case setting in that model, the Return Cap is not fully paid back by year 6 so our stake at that point in time is 9.5%. If you change that 6 to year 10 our stake is reduced to 5%.

Just to reiterate all of these terms are negotiable at the time of investment too.

Website also says: "In most cases, we’ll agree on a long-term residual stake for Earnest if you ever sell the company or raise more financing."

They don't explain it, but it sounds like the whole deal is effectively seed financing where they eventually get a 9.5% stake, but also with a 3-5x loan interest payment once you make money (which they're framing as "Shared Earnings").

And they're trying to hide the 9.5% part.

Hiding? https://earnestcapital.com/shared-earnings-agreement-digging...

I think it means we're on to something if we have folks in this thread arguing from boths sides that we're so founder friendly we'll never turn a profit AND that our terms are "predatory" and worse than a bank loan :)

The secret is there's a huge opportunity in between and tons of amazing founders and businesses we're excited to back.

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