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Comment by mbesto | Hacker News Reader

> 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?

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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.

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