15 ms·

Earnest Capital is live

368 points by tylertringas 8y ago

tylertringas 8y ago
Hello HN - I'm Tyler the founder of Earnest Capital. We officially went live today and I'm here for questions, comments, criticisms, whatever really.
- ljoshua 8y ago
  Very neat Tyler, love the attention to the non-VC funding space. Besides the no equity position of Earnest, could you do a quick compare/contrast with TinySeed, of similar ilk and recency?
  - tylertringas 8y ago
    Specific to the funding model, we both do a kind of profit-share, with the main difference being that Earnest's repayment will usually happen earlier (assuming the business is successful) but is capped, Tinyseed payments would be smaller in the earlier years and keep growing over time perpetually. Neither one is "better" and I probably wouldn't advise founders to choose between an offer from both on the basis of just the funding model. If you're successful with either model you definitely won't be upset about the details of which model you went with.
- ganeshkrishnan 8y ago
  No criticism from me. Love the concept and I hope there are more ventures like yours. Quick question: what is your investment criteria? Is a revenue of around $500 but a growth of 5% weekly good enough? If there was a checklist online that we could tick ourselves before we start talking to you, it would be awesome.
  - tylertringas 8y ago
    Thank you! Yep, check https://earnestcapital.com/faq/ https://earnestcapital.com/faq/ and let me know if anything needs to be added?
- ddebernardy 8y ago
  If I read your agreement correctly, your terms are so that you invest $150k in what is or nearly is a bootstrapped business, on what essentially seems like a profit share basis, and expect to get paid for your doing so until you've made $3M? It's not entirely clear to me what the benefit is compared to a bank loan or VC money if you can get the latter.
  - tylertringas 8y ago
    $3m?! No. This post walks through each of the terms in detail: https://earnestcapital.com/shared-earnings-agreement-digging-into-the-numbers/ https://earnestcapital.com/shared-earnings-agreement-digging... We have a Return Cap which is negotiated on a per deal basis but we guide toward 3-5x the initial investment.
    - ddebernardy 8y ago
      [Didn't read the doc properly]
      - extesy 8y ago
        You are confusing it with a valuation cap. Return cap in that very same document is 3X of the investment.
- SimianLogic2 8y ago
  Reminds me a lot of the Indie Fund in the game space, but slightly more profit-centered (which is not a bad thing). How did you settle on a 3-5x return cap? Are you planning to tune that over time? Did you consider a graded return schedule? I don't know if you've published your profit share or if that varies by deal, but I'm curious if something like 25% up until 100% recoup, 10% up to 200%, 5% up to 3-5x target would compare to a flat 10-15% or whatever. As a point of comparison, I used a portfolio loan to buy a business to run as a side project. The debt service on ~$125k is variable but roughly $500/month. At time of purchase that was about 20% of net, but that number will go down as the debt is paid and revenue grows. If I pay it off in ~5 years the total debt service will be in the range of $20-$30k... BUT that means almost all net is going to pay down the debt vs reinvesting in the business. I know you're targeting more bootstrappers who want to go full time, but if this type of funding were available for side hustle acquisitions I'd probably consider it pretty strongly instead of taking on a bunch of personal risk (even though the rewards for me become less on paper).
  - tylertringas 8y ago
    > Are you planning to tune that over time? Yes, very much consider this our next product. Will build, measure, learn, iterate as we go. > I used a portfolio loan to buy a business to run as a side project It's a useful comparison but not apples to apples. There are a lot more capital options to fund an operating business (ie SBA loans, IRA loans) than starting a new one. We are focused on the latter. Our financial model might be a good fit for acquiring co's but it's not our strategy. Happy to help if anybody else wants to give it a shot.
- heroic 8y ago
  Hi Tyler, this is amazing! Going through the FAQ it seems, you're not investing in India right now! Would love to know if and when you do!
  - tylertringas 8y ago
    Don't think we have the legal infrastructure to invest in Indian companies right now, but definitely could invest in a company that used Stripe Atlas to form a US entity: https://stripe.com/atlas https://stripe.com/atlas
- jkuria 8y ago
  Great concept. But Why is there nothing about the team behind it? It feels less trustworthy.
  - tylertringas 8y ago
    Good question! Small team for now. Me: https://twitter.com/tylertringas https://twitter.com/tylertringas Head of Platform: https://twitter.com/bentossell https://twitter.com/bentossell Amazing group of mentors: https://earnestcapital.com/earnest-mentorship/ https://earnestcapital.com/earnest-mentorship/
- nodesocket 8y ago
  Any idea the total number of investments you are looking to make a year? Handful, dozens? Is there a limit on the term? Let's say you invest $100,000 in a $3k MRR business. Unfortunately it does not grow, or maybe even MRR declines. What happens to the investment obligation?
  - tylertringas 8y ago
    10-12 per year. There's no limit. If the business stalls at $3k MRR (ie no Founder Earnings) it can go on running forever or shut it down. We would get a % if it was ever sold.
    - nodesocket 8y ago
      Thanks for the reply. So if after accepting investment, if the company does not work out and has to shut down, is there a personal liability owned back to Earnest Capital by the founders? Second, can you explain the valuation cap in terms of acquisition. Let's say I take $100k in investment, and 5 years later I sell the company for $10M. What is the max amount Earnest Capital will receive?
      - tylertringas 8y ago
        No personal liability. We assume some of these investments will fail for us. % of the sale would be roughly $100k / Valuation Cap (which is negotiable at time of investment).
- skrebbel 8y ago
  Tyler, I've been very interested in this development and I have a somewhat fundamental question to you. I've seen a number of VCs and other pundits recently say things of the form "there's a reason why for decades, there were only bank loans and VC and not much in-between". Eg Jerry Neumann (a NY based solo investor) has a nice twitter rant about it here: https://twitter.com/ganeumann/status/1093961051425697794 https://twitter.com/ganeumann/status/1093961051425697794 If I follow the math in his linked blog posts well (eg [0]), he's basically putting down the hypothesis that there's 3 categories of companies (determined by the alpha value of the power-law distribution they're in): 1. Companies where the risk and the upside potential are small. This is where bank loans are focused. 2. Companies where the risk is enormous but the upside potential is "meh". 3. Companies where the risk is enormous but the upside potential is also enormous. This is where VC is focused, and it's why they're all about finding those few big hits because this covers all the losses (or mediocre performance) of the rest. Neumann appears pretty confident about this hypothesis; not because he can explain the underlying phenomenon, but simply because until now he's not seen much successful funding for companies that's neither VC nor bank loans. And if his hypothesis is right, then you're targeting companies of type 2: investments with enormous risk (comparable to that of a high-growth startup) but at the same time you're hard-capping your upside at 5x. That seems madness. I don't think you're mad, however, so you must believe that his hypothesis is wrong. If so, why now? What changed in the world, or in the investment landscape, or in technology, that suddenly multiple people (you, indie.vc, etc etc) believe that a low-capped profit sharing scheme for startup investments is a good idea, when nobody did before? Did the risk go down? How did it? Why? Why now and not 10 years ago? Super interested in any insights you might have on this. Great job, hope you succeed (i.e. I hope to be proven wrong) [0] http://reactionwheel.net/2019/01/why-do-vcs-insist-on-only-investing-in-high-risk-high-return-companies.html http://reactionwheel.net/2019/01/why-do-vcs-insist-on-only-i... * disclaimer: I'm a founder, not an investor and I don't spend a lot of time thinking about this stuff. Ergo I probably misinterpreted a lot of what Neumann is saying. If someone (or Jerry himself) reads this and thinks they know better, I'll be happy to stand corrected.
  - SatvikBeri 8y ago
    I've worked at a lender that did loans to small businesses somewhere in between categories 1 and 2. The major thing that's changed is the availability of data. A $100k loan used to take several hours of expensive analyst time to process manually, and since most would be rejected, it wouldn't be worth it. Now a business can, e.g., securely share real bank account data. That makes the whole process much faster, which reduces the cost per loan, which makes smaller loans profitable. I imagine something similar can apply for small business equity.
- krstffr 8y ago
  Looks very interesting, are you investing in Sweden?
  - tylertringas 8y ago
    Definitely.
- mbesto 8y ago
  1. How is this different from venture debt? 2. How big is your fund?
  - tylertringas 8y ago
    It's not debt. No interest rate, no repayment schedule, no recourse.
- jedberg 8y ago
  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.
  - berberous 8y ago
    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."
    - fragsworth 8y ago
      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.
      - tylertringas 8y ago
        Hiding? https://earnestcapital.com/shared-earnings-agreement-digging-into-the-numbers/ https://earnestcapital.com/shared-earnings-agreement-digging...
  - tfehring 8y ago
    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-l1fY5zc97GetYkRjQ_zCi6by4 https://docs.google.com/spreadsheets/d/1h_L7oa3rbV8P-ZnMM-l1... edited for clarity
- hornbaker 8y ago
  Very cool, Tyler. Just applied. :)
- intelliderp 8y ago
  Any way to get involved on the investor side?
  - tylertringas 8y ago
    https://earnestcapital.com/contact/ https://earnestcapital.com/contact/
- icedchai 8y ago
  So is this basically like a loan, where I eventually have to pay back up to 300 to 500% of the initial principal? This assumes I don't go broke...
kubeans 8y ago
Do you believe there will be an industry of similar funds 5 years from now? If you're able to share, what is Earnest Capital's return profile? Do you have LPs? Thanks for doing this AMA!
- tylertringas 8y ago
  Yes, my goal (with transparency etc) is for there to be dozens of firms in this space. Confident it will happen. Thanks!
dmonn 8y ago
Hey Tyler! I'm actually super interested in Earnest. One thing I was thinking is, the traditional VC model works in cycles - founders raise some money, build & sell, raise some more, build & sell - by the time they raised $100M hopefully they are at least close to profit. How does that work with bootstrappers? Ideally they'd only have to raise money once (from you), but what happens after the $100k (example) run out and the business is only generating, let's say, $2k/month? Back to 9-to-5?
- tylertringas 8y ago
  Well, yes in some cases. Our goal is definitely for founders to get to personal break-even, where they can pay themselves enough to work on the business full-time, by the time our investment runs out. Some percentage of these will fail (startups are hard) and we're expecting that. Hopefully, you meet a ton of cool people along the way and we can sort out something cool as a next step that isn't 9-to-5 drudgery tho.
friendly_chap 8y ago
Wow, very interesting. My only question is about the 3-5x cap: given how many companies fail/never turn a profit, how is that going to give a return? They must be really confident in their ability to spot good companies. Very happy to see alternatives to giving away equity however.
- seibelj 8y ago
  They do take an equity stake but it only converts in a future funding round or acquisition. If you stay independent forever they can't provide any pressure. This is basically like normal equity but a weaker form I guess.
  - tylertringas 8y ago
    Yes, by default we don't take equity (shares, board seat, none of that). If you decide to raise a round of equity financing (ie VC) we could convert into equity alongside them and if you sell the company we get a % of that. There's a spreadsheet here that lays it out: https://earnestcapital.com/shared-earnings-agreement-digging-into-the-numbers/ https://earnestcapital.com/shared-earnings-agreement-digging...
moflome 8y ago
Congratulations on launching! Sounds like a nice compliment to IndieVC[0] and TinySeed [1]. I'm glad to see innovation here, interesting times! [0] https://www.indie.vc https://www.indie.vc - loan vs. future equity with buy-out [1] https://tinyseed.com https://tinyseed.com - equity with revenue share (?)
- tylertringas 8y ago
  Thanks! Yep, fun times.
no1youknowz 8y ago
I was very excited by Tinyseed. However, I didn't quite like the model. I inquired about a model similar to this and it was declined. Fair enough I thought. Now this comes along. Definitely sending out an email! Pretty excited to be honest.
- tylertringas 8y ago
  The thing is, this category of "not VC" is actually like 99% of all businesses. There's going to be a ton of diversity of viewpoints and alignment and I think it's good lots of folks are trying out different models. Not even clear to me that there will end up being one "best" approach over time.
asien 8y ago
Very excited for this. We have yet to find a funding model where products don’t turn to shit after the companies that raised hundreds of millions of dollars don’t meet their promises made to VC. MongoDB is a great example of a company shooting itself in the foot because they don’t meet the promises of growth and profitability the market is expecting. This fund is a great potentiel for dev tools and deep technology that needs only a tiny amount of capital at start and then can remain profitable with SaaS or Consulting. This model would be somewhat unacceptable for VC because they expect every company they fund to go public and cash out right after with 100% YoY growth , otherwise you’re not a good investment. Congratulations on this launch !
- kishinmanglani 8y ago
  How is MongoDB a great example of a company shooting itself in the foot? They IPO'd in Oct 2017 and the stock has almost quadrupled. EDIT: MDB will also probably get acquired in the next year too.
  - jasondc 8y ago
    This is what happens when you only read HN, you think MongoDB is going out of business, yet the company is worth $5 billion.
    - aliswe 8y ago
      Well put!
    - nathan_f77 8y ago
      Wow, I don't think I heard that MongoDB had an IPO and that they were worth $5 billion. Maybe I was on vacation when the IPO happened, so I wasn't checking Hacker News, because I'm sure I would have remembered that. All I see on HN is horror stories about MongoDB, or posts about migrating from MongoDB to Postgres.
elliekelly 8y ago
So the SEA functions as a sort of hybrid preferred shares/convertible note?
- tylertringas 8y ago
  Not really either of those. A closer version would be profit-share + a SAFE. The primary function is for us to share in the profit (or more specifically "founder earnings") of the business alongside the founder(s). If you sell the business or decide to raise a big equity round later, we convert a lot like a SAFE.
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j_shi 8y ago
Awesome to see innovation from capital providers on the instrument in the wild. As a niche market founder wish option like Earnest existed when we were raising early financing. Curious - to extent you're willing to share - what dynamics are like for LPs (assuming raising outside). Since median vc fund return is barely 1x, and traditional VCs sometimes blow up otherwise good niche companies by forcing them to go big or bust, targeting 3-5x returns with way faster liquidity for investors a super interesting alternative. And if the niche market turns out to be a massive market, can still go in with eyes wide open!
- tylertringas 8y ago
  > As a niche market founder wish option like Earnest existed when we were raising early financing. Can't tell you how often I hear this. > what dynamics are like for LPs Can't really say much on this because SEC. But yes, being better than the average VC fund (not to mention better liquidity and lower concentration of returns) is not a high bar IMHO.
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a13n 8y ago
> We agree on a Return Cap which is a multiple of the initial investment (typically 3-5x) Why is this better than just taking out like a 20-30% APR business loan?
- dmonn 8y ago
  The business loan is slowing down your business no matter what. Earnest only takes their return once you're in the position to pay yourself a salary. If you reinvest everything in the business, they don't get anything.
  - a13n 8y ago
    Yeah, sure. Just seems like paying a bank 20-30% per year is a way better deal than slowly bleeding 200-400% back to Earnest. You're paying WAY more money (read: 10x) for a more flexible payment schedule.
    - nkohari 8y ago
      At the stage in which they're investing, a bank loan will generally be secured against your personal assets, whereas the money from Earnest is not. If you raise money from Earnest and your business fails, Earnest loses their investment. If you raise money from a bank and your business fails, you may lose your house or declare bankruptcy.
    - robhunter 8y ago
      I don't think you understand how interest rates work. If you look at the repayment schedule in the model, you'll find that Earnest ends up being CHEAPER than 20-30% without the personal guarantees required by a bank: https://docs.google.com/spreadsheets/d/1h_L7oa3rbV8P-ZnMM-l1fY5zc97GetYkRjQ_zCi6by4/edit#gid=0 https://docs.google.com/spreadsheets/d/1h_L7oa3rbV8P-ZnMM-l1... A stream of cash flows that goes: 0: -150,000 1: 0 2: 0 3: 1,800 4: 14,400 5: 50,400 6: 97,200 7: 205,200 8: 81,000 The IRR/effective "interest rate" of this stream of cash flows is 18.3% - lower than the 20%-30% you're claiming.
      - deleted 8y ago
shafyy 8y ago
This is amazing. Good luck!
JackFr 8y ago
This looks a lot like a loan. I would look at OnDeck or Kabbage before going this route.
- tylertringas 8y ago
  Founders should def consider all their options. It's very much not a loan though. There is no repayment schedule (we get paid as the founders generate Founder Earnings) and there's no personal guarantee. On average I think it's more likely that we would fund a business earlier that might use a number of cool new debt products to continue growing once it hits a level of revenue and business maturity.
- treis 8y ago
  Both of those require 1+ year in business and significant revenue. So yes, this is definitely a loan and it has relatively bad terms but it's targeted at businesses with no credit.
- nathan_f77 8y ago
  Thanks a lot for mentioning OnDeck and Kabbage! I hadn't heard of these, and I didn't realize I had some other options for loans. I'm working remotely on a US startup, and some additional capital would be really helpful, to pay for a redesign and some contract work. EDIT: Ah, I live in Thailand, so I probably won't be able to get a business loan through these companies. (Even though my company is a US C-Corp.) Also I probably don't have enough revenue yet.
- thatthatis 8y ago
  In the success path it costs like a loan. In the failure path it gets paid nothing
lgregg 8y ago
Tyler, What's your position on B-Corps that aren't 100% profit driven? https://bcorporation.net https://bcorporation.net
- tylertringas 8y ago
  I like them a lot and don't see any problem with us investing via a SEAL in a B-Corp.
desireco42 8y ago
Honestly, this looks perfect for my case, I am too early for Indie.vc for example, but overall, I love what is happening in this space. Pretty much, you get to prove your business model somewhat and you will get support. Most of the time, this will result in much better growth and focus, and few of times things don't work out, it will not be as often as it would be without business being proven. It is great time to be bootstrapper.
sumitsrivastava 8y ago
A quick question for everyone: Is remote that big? Most indie projects I read about these days are something related to remote.
- jasondc 8y ago
  yes, and the companies that do it well have a major competitive advantage
- tylertringas 8y ago
  Uh huh. https://earnestcapital.com/request-for-startups-1-remote/ https://earnestcapital.com/request-for-startups-1-remote/
  - sumitsrivastava 8y ago
    Yup, I already read that before asking, hence the question. Is remote really that big?
staunch 8y ago
Anyone helping early stage startups is doing god's work as far as I'm concerned. Technology is what pushes the world forward and anything that helps that is, with limited exceptions, a very positive thing. My questions/comments/criticisms after a brief look, please correct me if I'm wrong: 1. It funds startups that already have growing revenue, which is fine, but that's the hardest part by far. So it might filter out all of the best startups who can just choose to grind it out a few more months, having already overcome the biggest hurdle. Taking the calculated risk of funding startups that are pre-product/market fit is where the real magic happens. 2. It's legally complicated which means a smart founder would definitely want a lawyer (unlike SAFE), which could be quite costly. It could (potentially) scare off future investment as well. 3. It converts to equity (optionally, which seems scary) to a hefty ~10% valuation, which is more than YC takes in exchange for a much, much better deal because they all but guarantee successful startups will raise a large amount of money at a very high valuation. In effect this costs a startup maybe 3-10x more than YC on the VC route. 4. Like TinySeed, I think it also ignores the inescapable fact that startup investing is a hits-based business regardless of what anyone wants it to be. One out of 50 investments is going to be worth more than the other 49, so it makes sense to align interests with reality. By focusing on getting paid from the biggest winners, you can afford to be much more generous and high-minded with the rest. 5. Also like TinySeed, it doesn't seem to account for just how high living expenses can be for founders with families, etc. Having to negotiate with your investors about paying rent is going to feel a lot like having a boss, which could be very demoralizing for founders. YC is extremely careful not to make founders feel like employees for good reason. 6. Having to negotiate the amount of investment also seems less then ideal. Knowing exactly what the deal is would be much better than having to haggle as the start of the relationship. 7. Wildcard: have you considered evolving this into an ICO-funder for startups? Equity crowdfunding with an initial seed investor seems like a huge idea. I applaud the effort and hope it becomes huge. I wouldn't bother commenting if I didn't!
- staunch 8y ago
  Unfortunately, after further analysis, my suspicion that this is a very bad deal for founders seems to be true. A founder would have to be desperate and ignorant to take this deal, and no one deserves to have years of hard work wasted by taking a predatory deal like this. I hope they fix their terms but based on how misleading they've been, I would never personally do business with this person.
networkimprov 8y ago
A "minimum viable product" can raise the range of capital discussed on the FAQ via crowdfunding (Kickstarter, etc). Not every product category is suitable for crowdfunds, but for those that are, a successful Kickstarter campaign is also an effective marketing launch, worth a small fortune by itself.
- axlemax 8y ago
  I read this excellent article Last week about raising funds on Kickstarter. TLDR some categories have a hard time raising on Kickstarter https://thehustle.co/crowdfunding-success-rate https://thehustle.co/crowdfunding-success-rate
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javery 8y ago
I always feels it's disingenuous to say you don't take equity if you ask for warrants or other % of the upside - it's essentially a proxy for equity. When you factor in a 3-5X cap, PLUS warrants - this doesn't seem like a better deal than something like Lighter Capital which has a smaller cap and zero warrants.
- js4 8y ago
  Where do you see warrants?
  - javery 8y ago
    "In most cases, we’ll agree on a long-term residual stake for Earnest if you ever sell the company or raise more financing. We want to be on your team for the long-term, but don’t want to provide any pressure to “exit.”" This seems to imply that they get a % of an exit or future financing even once the cap has been reached. That is functionally warrants right?
    - VintageLight 8y ago
      They get a % of an exit if you haven't fully repaid to the cap
      - javery 8y ago
        If that's true I take it all back, but the way I read "long-term residual" was that even after you paid it back they still got a piece of the action.
        tylertringas 8y ago
        Once Return Cap is fully repaid the founder can run the business profitably forever and not pay us anything more. We do typically prefer an option for a % only if the business is sold but can do a deal (with a higher Return Cap) that excludes this easily.
      - 8y ago
rajacombinator 8y ago
If anyone is looking for a blog post writing prompt, I would love to see something written from a founder's perspective breaking down when one should consider this form of funding, vs. YC/VC, vs. "grinding it out" and continuing to bootstrap. Or taking personal loans, etc. This could include some analysis of the total cost of each option, the benefits, etc. Specify numbers about you should use X amount to pay your own salary, Y to hire people, Z for marketing/other spend, etc. I think the YC/VC pre-market-fit-hoping-for-billions model is well understood. But I find it difficult to understand when a bootstrapped cashflow positive business should consider any of these options. If one has a bootstrapped side business making $X/mo and a job making $150k+Y per month, when should one go all in on the business?
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throwaway-1283 8y ago
Income Sharing Agreements are super interesting. Definitely an opportunity to building a SaaS for managing agreements from contract to facilitating the payments over the lifetime of the agreement...
lifeisstillgood 8y ago
Rob Walling is launching something a bit similar (cannot remember the name right now). But it's aimed at bootstrapped starters who aren't planning a unicorn billionndollar exit. Why is this now a model? Too much cash chasing too few unicorns ? Too much money lost on unicorns that cannot fly or a realisation that chasing unicorns leaves herds of perfectly good horses untended?
- patio11 8y ago
  I'm a (tiny) LP in TinySeed (Rob's fund), another effort with similar thesis, and am broadly supportive of these experiments generally. Speaking solely for myself, but gesturing in the general direction of my peer set: there exist some software entrepreneurs who have substantial operational expertise and have made some money, but who do not feel like they'd add much value in the unicorn hunt, partly due to access reasons and partly due to different skills. There's a distinct body of practice between e.g. the things a YC partner would tell you to do about fundraising, the things a growth stage VC fund would tell you to do about organization building, and the things a self-funded software founder would tell you to do about e.g. testing AdWords copy. There is a certain degree of overlap, in the same sense that all of them overlap someone whose business model is buy-and-hold apartment buildings in Chicago, but there is a reason none of them buy-and-hold apartment buildings in Chicago. By comparison, I feel reasonably confident that "six figure SaaS business trying to get to seven" is somewhere I understand pretty thoroughly, would almost always enjoy a conversation with that founder, and (napkin math) looks plausibly mutually interesting. Why now and not five years ago? It feels like a generation-of-business thing: the reason everybody who made money at Google / Facebook didn't invest five years before they started investing was because they hadn't made money at Google / Facebook. Did the opportunity exist five years ago? Probably, as evidenced by the successes from that generation. Is the opportunity better now? Plausibly yes, as demonstrated by all of the people who were successful writing down what they did, doing technology transfer on that to new operators (often for free), the ecosystem radically improving (inputs, platforms, employees, exit options all got a bunch better), etc.
  - lifeisstillgood 8y ago
    My apologies for leaving this tab open and not replying - it actually sparked some ideas I wanted to get into book form. There being distinct skill sets coming out of the (soon to be flooded) ex-unicorn investor market is an exciting idea as much as anything
danschumann 8y ago
This is great stuff.. I've been waiting for a VC firm for a while that wouldn't just push me to pump and dump. I'm making a company for the long haul.
gnicholas 8y ago
Do startups that raise from you tend to have other investors come on at the same time? If so, do they use similar terms or something completely different? If this doesn't happen now, would you hope that it would in the future (that is, that people would want to follow a round led by you)?
bfritton 8y ago
Love this
laser 8y ago
In principle this seems pretty cool, but the gap between what's communicated on the website, and what's actually contained in the 'Shared Earning Agreement' [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'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. 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'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. This probably seems abstract, so I'll make it vividly clear with an example. Let'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't monetized at all and paid any off, this could be a full 50% stake. 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 "$3 million" valuation could convert to a 15% equity stake in your company? I'd love to see how this could be revised to address this issue, and I'd love to see the website more clearly communicate the equity implications. As of now, I can'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't fully comprehend the terms they were agreeing to. 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 :) [1] https://docs.google.com/document/d/1MoLiH_VnhX-0vfZ1zgMSfpcIt0rdyD9rc27BbypplDI/ https://docs.google.com/document/d/1MoLiH_VnhX-0vfZ1zgMSfpcI...
- hotpockets 8y ago
  Would it be legal for the startup to take a loan of $800k and just pay off the remaining balance? Then EC gets their 5x, and you keep your equity? (Probably the new investors would see the advantage of this)
tobiasszarowicz 8y ago
I really like this concept. First Investors often face the follow up dilemma when they cant join a follow up round and get squeezed out with much a lower valuation. Am I right that this wont happen to you because your earning share is basically just a position on cost side? Or could that even be an obstacle for follow up rounds?

368 points by tylertringas 8y ago

Hello HN - I'm Tyler the founder of Earnest Capital. We officially went live today and I'm here for questions, comments, criticisms, whatever really.

ljoshua 8y ago
Very neat Tyler, love the attention to the non-VC funding space. Besides the no equity position of Earnest, could you do a quick compare/contrast with TinySeed, of similar ilk and recency?
- tylertringas 8y ago
  Specific to the funding model, we both do a kind of profit-share, with the main difference being that Earnest's repayment will usually happen earlier (assuming the business is successful) but is capped, Tinyseed payments would be smaller in the earlier years and keep growing over time perpetually. Neither one is "better" and I probably wouldn't advise founders to choose between an offer from both on the basis of just the funding model. If you're successful with either model you definitely won't be upset about the details of which model you went with.
ganeshkrishnan 8y ago
No criticism from me. Love the concept and I hope there are more ventures like yours. Quick question: what is your investment criteria? Is a revenue of around $500 but a growth of 5% weekly good enough? If there was a checklist online that we could tick ourselves before we start talking to you, it would be awesome.
- tylertringas 8y ago
  Thank you! Yep, check https://earnestcapital.com/faq/ https://earnestcapital.com/faq/ and let me know if anything needs to be added?
ddebernardy 8y ago
If I read your agreement correctly, your terms are so that you invest $150k in what is or nearly is a bootstrapped business, on what essentially seems like a profit share basis, and expect to get paid for your doing so until you've made $3M? It's not entirely clear to me what the benefit is compared to a bank loan or VC money if you can get the latter.
- tylertringas 8y ago
  $3m?! No. This post walks through each of the terms in detail: https://earnestcapital.com/shared-earnings-agreement-digging-into-the-numbers/ https://earnestcapital.com/shared-earnings-agreement-digging... We have a Return Cap which is negotiated on a per deal basis but we guide toward 3-5x the initial investment.
  - ddebernardy 8y ago
    [Didn't read the doc properly]
    - extesy 8y ago
      You are confusing it with a valuation cap. Return cap in that very same document is 3X of the investment.
SimianLogic2 8y ago
Reminds me a lot of the Indie Fund in the game space, but slightly more profit-centered (which is not a bad thing). How did you settle on a 3-5x return cap? Are you planning to tune that over time? Did you consider a graded return schedule? I don't know if you've published your profit share or if that varies by deal, but I'm curious if something like 25% up until 100% recoup, 10% up to 200%, 5% up to 3-5x target would compare to a flat 10-15% or whatever. As a point of comparison, I used a portfolio loan to buy a business to run as a side project. The debt service on ~$125k is variable but roughly $500/month. At time of purchase that was about 20% of net, but that number will go down as the debt is paid and revenue grows. If I pay it off in ~5 years the total debt service will be in the range of $20-$30k... BUT that means almost all net is going to pay down the debt vs reinvesting in the business. I know you're targeting more bootstrappers who want to go full time, but if this type of funding were available for side hustle acquisitions I'd probably consider it pretty strongly instead of taking on a bunch of personal risk (even though the rewards for me become less on paper).
- tylertringas 8y ago
  > Are you planning to tune that over time? Yes, very much consider this our next product. Will build, measure, learn, iterate as we go. > I used a portfolio loan to buy a business to run as a side project It's a useful comparison but not apples to apples. There are a lot more capital options to fund an operating business (ie SBA loans, IRA loans) than starting a new one. We are focused on the latter. Our financial model might be a good fit for acquiring co's but it's not our strategy. Happy to help if anybody else wants to give it a shot.
heroic 8y ago
Hi Tyler, this is amazing! Going through the FAQ it seems, you're not investing in India right now! Would love to know if and when you do!
- tylertringas 8y ago
  Don't think we have the legal infrastructure to invest in Indian companies right now, but definitely could invest in a company that used Stripe Atlas to form a US entity: https://stripe.com/atlas https://stripe.com/atlas
jkuria 8y ago
Great concept. But Why is there nothing about the team behind it? It feels less trustworthy.
- tylertringas 8y ago
  Good question! Small team for now. Me: https://twitter.com/tylertringas https://twitter.com/tylertringas Head of Platform: https://twitter.com/bentossell https://twitter.com/bentossell Amazing group of mentors: https://earnestcapital.com/earnest-mentorship/ https://earnestcapital.com/earnest-mentorship/
nodesocket 8y ago
Any idea the total number of investments you are looking to make a year? Handful, dozens? Is there a limit on the term? Let's say you invest $100,000 in a $3k MRR business. Unfortunately it does not grow, or maybe even MRR declines. What happens to the investment obligation?
- tylertringas 8y ago
  10-12 per year. There's no limit. If the business stalls at $3k MRR (ie no Founder Earnings) it can go on running forever or shut it down. We would get a % if it was ever sold.
  - nodesocket 8y ago
    Thanks for the reply. So if after accepting investment, if the company does not work out and has to shut down, is there a personal liability owned back to Earnest Capital by the founders? Second, can you explain the valuation cap in terms of acquisition. Let's say I take $100k in investment, and 5 years later I sell the company for $10M. What is the max amount Earnest Capital will receive?
    - tylertringas 8y ago
      No personal liability. We assume some of these investments will fail for us. % of the sale would be roughly $100k / Valuation Cap (which is negotiable at time of investment).
skrebbel 8y ago
Tyler, I've been very interested in this development and I have a somewhat fundamental question to you. I've seen a number of VCs and other pundits recently say things of the form "there's a reason why for decades, there were only bank loans and VC and not much in-between". Eg Jerry Neumann (a NY based solo investor) has a nice twitter rant about it here: https://twitter.com/ganeumann/status/1093961051425697794 https://twitter.com/ganeumann/status/1093961051425697794 If I follow the math in his linked blog posts well (eg [0]), he's basically putting down the hypothesis that there's 3 categories of companies (determined by the alpha value of the power-law distribution they're in): 1. Companies where the risk and the upside potential are small. This is where bank loans are focused. 2. Companies where the risk is enormous but the upside potential is "meh". 3. Companies where the risk is enormous but the upside potential is also enormous. This is where VC is focused, and it's why they're all about finding those few big hits because this covers all the losses (or mediocre performance) of the rest. Neumann appears pretty confident about this hypothesis; not because he can explain the underlying phenomenon, but simply because until now he's not seen much successful funding for companies that's neither VC nor bank loans. And if his hypothesis is right, then you're targeting companies of type 2: investments with enormous risk (comparable to that of a high-growth startup) but at the same time you're hard-capping your upside at 5x. That seems madness. I don't think you're mad, however, so you must believe that his hypothesis is wrong. If so, why now? What changed in the world, or in the investment landscape, or in technology, that suddenly multiple people (you, indie.vc, etc etc) believe that a low-capped profit sharing scheme for startup investments is a good idea, when nobody did before? Did the risk go down? How did it? Why? Why now and not 10 years ago? Super interested in any insights you might have on this. Great job, hope you succeed (i.e. I hope to be proven wrong) [0] http://reactionwheel.net/2019/01/why-do-vcs-insist-on-only-investing-in-high-risk-high-return-companies.html http://reactionwheel.net/2019/01/why-do-vcs-insist-on-only-i... * disclaimer: I'm a founder, not an investor and I don't spend a lot of time thinking about this stuff. Ergo I probably misinterpreted a lot of what Neumann is saying. If someone (or Jerry himself) reads this and thinks they know better, I'll be happy to stand corrected.
- SatvikBeri 8y ago
  I've worked at a lender that did loans to small businesses somewhere in between categories 1 and 2. The major thing that's changed is the availability of data. A $100k loan used to take several hours of expensive analyst time to process manually, and since most would be rejected, it wouldn't be worth it. Now a business can, e.g., securely share real bank account data. That makes the whole process much faster, which reduces the cost per loan, which makes smaller loans profitable. I imagine something similar can apply for small business equity.
krstffr 8y ago
Looks very interesting, are you investing in Sweden?
- tylertringas 8y ago
  Definitely.
mbesto 8y ago
1. How is this different from venture debt? 2. How big is your fund?
- tylertringas 8y ago
  It's not debt. No interest rate, no repayment schedule, no recourse.
jedberg 8y ago
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.
- berberous 8y ago
  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."
  - fragsworth 8y ago
    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.
    - tylertringas 8y ago
      Hiding? https://earnestcapital.com/shared-earnings-agreement-digging-into-the-numbers/ https://earnestcapital.com/shared-earnings-agreement-digging...
- tfehring 8y ago
  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-l1fY5zc97GetYkRjQ_zCi6by4 https://docs.google.com/spreadsheets/d/1h_L7oa3rbV8P-ZnMM-l1... edited for clarity
hornbaker 8y ago
Very cool, Tyler. Just applied. :)
intelliderp 8y ago
Any way to get involved on the investor side?
- tylertringas 8y ago
  https://earnestcapital.com/contact/ https://earnestcapital.com/contact/
icedchai 8y ago
So is this basically like a loan, where I eventually have to pay back up to 300 to 500% of the initial principal? This assumes I don't go broke...

kubeans 8y ago

Do you believe there will be an industry of similar funds 5 years from now? If you're able to share, what is Earnest Capital's return profile? Do you have LPs? Thanks for doing this AMA!

tylertringas 8y ago
Yes, my goal (with transparency etc) is for there to be dozens of firms in this space. Confident it will happen. Thanks!

dmonn 8y ago

Hey Tyler! I'm actually super interested in Earnest. One thing I was thinking is, the traditional VC model works in cycles - founders raise some money, build & sell, raise some more, build & sell - by the time they raised $100M hopefully they are at least close to profit. How does that work with bootstrappers? Ideally they'd only have to raise money once (from you), but what happens after the $100k (example) run out and the business is only generating, let's say, $2k/month? Back to 9-to-5?

tylertringas 8y ago
Well, yes in some cases. Our goal is definitely for founders to get to personal break-even, where they can pay themselves enough to work on the business full-time, by the time our investment runs out. Some percentage of these will fail (startups are hard) and we're expecting that. Hopefully, you meet a ton of cool people along the way and we can sort out something cool as a next step that isn't 9-to-5 drudgery tho.

friendly_chap 8y ago

Wow, very interesting. My only question is about the 3-5x cap: given how many companies fail/never turn a profit, how is that going to give a return? They must be really confident in their ability to spot good companies. Very happy to see alternatives to giving away equity however.

seibelj 8y ago
They do take an equity stake but it only converts in a future funding round or acquisition. If you stay independent forever they can't provide any pressure. This is basically like normal equity but a weaker form I guess.
- tylertringas 8y ago
  Yes, by default we don't take equity (shares, board seat, none of that). If you decide to raise a round of equity financing (ie VC) we could convert into equity alongside them and if you sell the company we get a % of that. There's a spreadsheet here that lays it out: https://earnestcapital.com/shared-earnings-agreement-digging-into-the-numbers/ https://earnestcapital.com/shared-earnings-agreement-digging...

moflome 8y ago

Congratulations on launching! Sounds like a nice compliment to IndieVC[0] and TinySeed [1]. I'm glad to see innovation here, interesting times! [0] https://www.indie.vc https://www.indie.vc - loan vs. future equity with buy-out [1] https://tinyseed.com https://tinyseed.com - equity with revenue share (?)

tylertringas 8y ago
Thanks! Yep, fun times.

no1youknowz 8y ago

I was very excited by Tinyseed. However, I didn't quite like the model. I inquired about a model similar to this and it was declined. Fair enough I thought. Now this comes along. Definitely sending out an email! Pretty excited to be honest.

tylertringas 8y ago
The thing is, this category of "not VC" is actually like 99% of all businesses. There's going to be a ton of diversity of viewpoints and alignment and I think it's good lots of folks are trying out different models. Not even clear to me that there will end up being one "best" approach over time.

asien 8y ago

Very excited for this. We have yet to find a funding model where products don’t turn to shit after the companies that raised hundreds of millions of dollars don’t meet their promises made to VC. MongoDB is a great example of a company shooting itself in the foot because they don’t meet the promises of growth and profitability the market is expecting. This fund is a great potentiel for dev tools and deep technology that needs only a tiny amount of capital at start and then can remain profitable with SaaS or Consulting. This model would be somewhat unacceptable for VC because they expect every company they fund to go public and cash out right after with 100% YoY growth , otherwise you’re not a good investment. Congratulations on this launch !

kishinmanglani 8y ago
How is MongoDB a great example of a company shooting itself in the foot? They IPO'd in Oct 2017 and the stock has almost quadrupled. EDIT: MDB will also probably get acquired in the next year too.
- jasondc 8y ago
  This is what happens when you only read HN, you think MongoDB is going out of business, yet the company is worth $5 billion.
  - aliswe 8y ago
    Well put!
  - nathan_f77 8y ago
    Wow, I don't think I heard that MongoDB had an IPO and that they were worth $5 billion. Maybe I was on vacation when the IPO happened, so I wasn't checking Hacker News, because I'm sure I would have remembered that. All I see on HN is horror stories about MongoDB, or posts about migrating from MongoDB to Postgres.

elliekelly 8y ago

So the SEA functions as a sort of hybrid preferred shares/convertible note?

tylertringas 8y ago
Not really either of those. A closer version would be profit-share + a SAFE. The primary function is for us to share in the profit (or more specifically "founder earnings") of the business alongside the founder(s). If you sell the business or decide to raise a big equity round later, we convert a lot like a SAFE.
- deleted 8y ago
  [deleted]

j_shi 8y ago

Awesome to see innovation from capital providers on the instrument in the wild. As a niche market founder wish option like Earnest existed when we were raising early financing. Curious - to extent you're willing to share - what dynamics are like for LPs (assuming raising outside). Since median vc fund return is barely 1x, and traditional VCs sometimes blow up otherwise good niche companies by forcing them to go big or bust, targeting 3-5x returns with way faster liquidity for investors a super interesting alternative. And if the niche market turns out to be a massive market, can still go in with eyes wide open!

tylertringas 8y ago
> As a niche market founder wish option like Earnest existed when we were raising early financing. Can't tell you how often I hear this. > what dynamics are like for LPs Can't really say much on this because SEC. But yes, being better than the average VC fund (not to mention better liquidity and lower concentration of returns) is not a high bar IMHO.

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a13n 8y ago

> We agree on a Return Cap which is a multiple of the initial investment (typically 3-5x) Why is this better than just taking out like a 20-30% APR business loan?

dmonn 8y ago
The business loan is slowing down your business no matter what. Earnest only takes their return once you're in the position to pay yourself a salary. If you reinvest everything in the business, they don't get anything.
- a13n 8y ago
  Yeah, sure. Just seems like paying a bank 20-30% per year is a way better deal than slowly bleeding 200-400% back to Earnest. You're paying WAY more money (read: 10x) for a more flexible payment schedule.
  - nkohari 8y ago
    At the stage in which they're investing, a bank loan will generally be secured against your personal assets, whereas the money from Earnest is not. If you raise money from Earnest and your business fails, Earnest loses their investment. If you raise money from a bank and your business fails, you may lose your house or declare bankruptcy.
  - robhunter 8y ago
    I don't think you understand how interest rates work. If you look at the repayment schedule in the model, you'll find that Earnest ends up being CHEAPER than 20-30% without the personal guarantees required by a bank: https://docs.google.com/spreadsheets/d/1h_L7oa3rbV8P-ZnMM-l1fY5zc97GetYkRjQ_zCi6by4/edit#gid=0 https://docs.google.com/spreadsheets/d/1h_L7oa3rbV8P-ZnMM-l1... A stream of cash flows that goes: 0: -150,000 1: 0 2: 0 3: 1,800 4: 14,400 5: 50,400 6: 97,200 7: 205,200 8: 81,000 The IRR/effective "interest rate" of this stream of cash flows is 18.3% - lower than the 20%-30% you're claiming.
    - deleted 8y ago

shafyy 8y ago

This is amazing. Good luck!

JackFr 8y ago

This looks a lot like a loan. I would look at OnDeck or Kabbage before going this route.

tylertringas 8y ago
Founders should def consider all their options. It's very much not a loan though. There is no repayment schedule (we get paid as the founders generate Founder Earnings) and there's no personal guarantee. On average I think it's more likely that we would fund a business earlier that might use a number of cool new debt products to continue growing once it hits a level of revenue and business maturity.
treis 8y ago
Both of those require 1+ year in business and significant revenue. So yes, this is definitely a loan and it has relatively bad terms but it's targeted at businesses with no credit.
nathan_f77 8y ago
Thanks a lot for mentioning OnDeck and Kabbage! I hadn't heard of these, and I didn't realize I had some other options for loans. I'm working remotely on a US startup, and some additional capital would be really helpful, to pay for a redesign and some contract work. EDIT: Ah, I live in Thailand, so I probably won't be able to get a business loan through these companies. (Even though my company is a US C-Corp.) Also I probably don't have enough revenue yet.
thatthatis 8y ago
In the success path it costs like a loan. In the failure path it gets paid nothing

lgregg 8y ago

Tyler, What's your position on B-Corps that aren't 100% profit driven? https://bcorporation.net https://bcorporation.net

tylertringas 8y ago
I like them a lot and don't see any problem with us investing via a SEAL in a B-Corp.

desireco42 8y ago

Honestly, this looks perfect for my case, I am too early for Indie.vc for example, but overall, I love what is happening in this space. Pretty much, you get to prove your business model somewhat and you will get support. Most of the time, this will result in much better growth and focus, and few of times things don't work out, it will not be as often as it would be without business being proven. It is great time to be bootstrapper.

sumitsrivastava 8y ago

A quick question for everyone: Is remote that big? Most indie projects I read about these days are something related to remote.

jasondc 8y ago
yes, and the companies that do it well have a major competitive advantage
tylertringas 8y ago
Uh huh. https://earnestcapital.com/request-for-startups-1-remote/ https://earnestcapital.com/request-for-startups-1-remote/
- sumitsrivastava 8y ago
  Yup, I already read that before asking, hence the question. Is remote really that big?

staunch 8y ago

Anyone helping early stage startups is doing god's work as far as I'm concerned. Technology is what pushes the world forward and anything that helps that is, with limited exceptions, a very positive thing. My questions/comments/criticisms after a brief look, please correct me if I'm wrong: 1. It funds startups that already have growing revenue, which is fine, but that's the hardest part by far. So it might filter out all of the best startups who can just choose to grind it out a few more months, having already overcome the biggest hurdle. Taking the calculated risk of funding startups that are pre-product/market fit is where the real magic happens. 2. It's legally complicated which means a smart founder would definitely want a lawyer (unlike SAFE), which could be quite costly. It could (potentially) scare off future investment as well. 3. It converts to equity (optionally, which seems scary) to a hefty ~10% valuation, which is more than YC takes in exchange for a much, much better deal because they all but guarantee successful startups will raise a large amount of money at a very high valuation. In effect this costs a startup maybe 3-10x more than YC on the VC route. 4. Like TinySeed, I think it also ignores the inescapable fact that startup investing is a hits-based business regardless of what anyone wants it to be. One out of 50 investments is going to be worth more than the other 49, so it makes sense to align interests with reality. By focusing on getting paid from the biggest winners, you can afford to be much more generous and high-minded with the rest. 5. Also like TinySeed, it doesn't seem to account for just how high living expenses can be for founders with families, etc. Having to negotiate with your investors about paying rent is going to feel a lot like having a boss, which could be very demoralizing for founders. YC is extremely careful not to make founders feel like employees for good reason. 6. Having to negotiate the amount of investment also seems less then ideal. Knowing exactly what the deal is would be much better than having to haggle as the start of the relationship. 7. Wildcard: have you considered evolving this into an ICO-funder for startups? Equity crowdfunding with an initial seed investor seems like a huge idea. I applaud the effort and hope it becomes huge. I wouldn't bother commenting if I didn't!

staunch 8y ago
Unfortunately, after further analysis, my suspicion that this is a very bad deal for founders seems to be true. A founder would have to be desperate and ignorant to take this deal, and no one deserves to have years of hard work wasted by taking a predatory deal like this. I hope they fix their terms but based on how misleading they've been, I would never personally do business with this person.

networkimprov 8y ago

A "minimum viable product" can raise the range of capital discussed on the FAQ via crowdfunding (Kickstarter, etc). Not every product category is suitable for crowdfunds, but for those that are, a successful Kickstarter campaign is also an effective marketing launch, worth a small fortune by itself.

axlemax 8y ago
I read this excellent article Last week about raising funds on Kickstarter. TLDR some categories have a hard time raising on Kickstarter https://thehustle.co/crowdfunding-success-rate https://thehustle.co/crowdfunding-success-rate

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javery 8y ago

I always feels it's disingenuous to say you don't take equity if you ask for warrants or other % of the upside - it's essentially a proxy for equity. When you factor in a 3-5X cap, PLUS warrants - this doesn't seem like a better deal than something like Lighter Capital which has a smaller cap and zero warrants.

js4 8y ago
Where do you see warrants?
- javery 8y ago
  "In most cases, we’ll agree on a long-term residual stake for Earnest if you ever sell the company or raise more financing. We want to be on your team for the long-term, but don’t want to provide any pressure to “exit.”" This seems to imply that they get a % of an exit or future financing even once the cap has been reached. That is functionally warrants right?
  - VintageLight 8y ago
    They get a % of an exit if you haven't fully repaid to the cap
    - javery 8y ago
      If that's true I take it all back, but the way I read "long-term residual" was that even after you paid it back they still got a piece of the action.
      - tylertringas 8y ago
        Once Return Cap is fully repaid the founder can run the business profitably forever and not pay us anything more. We do typically prefer an option for a % only if the business is sold but can do a deal (with a higher Return Cap) that excludes this easily.
    - 8y ago

rajacombinator 8y ago

If anyone is looking for a blog post writing prompt, I would love to see something written from a founder's perspective breaking down when one should consider this form of funding, vs. YC/VC, vs. "grinding it out" and continuing to bootstrap. Or taking personal loans, etc. This could include some analysis of the total cost of each option, the benefits, etc. Specify numbers about you should use X amount to pay your own salary, Y to hire people, Z for marketing/other spend, etc. I think the YC/VC pre-market-fit-hoping-for-billions model is well understood. But I find it difficult to understand when a bootstrapped cashflow positive business should consider any of these options. If one has a bootstrapped side business making $X/mo and a job making $150k+Y per month, when should one go all in on the business?

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throwaway-1283 8y ago

Income Sharing Agreements are super interesting. Definitely an opportunity to building a SaaS for managing agreements from contract to facilitating the payments over the lifetime of the agreement...

lifeisstillgood 8y ago

Rob Walling is launching something a bit similar (cannot remember the name right now). But it's aimed at bootstrapped starters who aren't planning a unicorn billionndollar exit. Why is this now a model? Too much cash chasing too few unicorns ? Too much money lost on unicorns that cannot fly or a realisation that chasing unicorns leaves herds of perfectly good horses untended?

patio11 8y ago
I'm a (tiny) LP in TinySeed (Rob's fund), another effort with similar thesis, and am broadly supportive of these experiments generally. Speaking solely for myself, but gesturing in the general direction of my peer set: there exist some software entrepreneurs who have substantial operational expertise and have made some money, but who do not feel like they'd add much value in the unicorn hunt, partly due to access reasons and partly due to different skills. There's a distinct body of practice between e.g. the things a YC partner would tell you to do about fundraising, the things a growth stage VC fund would tell you to do about organization building, and the things a self-funded software founder would tell you to do about e.g. testing AdWords copy. There is a certain degree of overlap, in the same sense that all of them overlap someone whose business model is buy-and-hold apartment buildings in Chicago, but there is a reason none of them buy-and-hold apartment buildings in Chicago. By comparison, I feel reasonably confident that "six figure SaaS business trying to get to seven" is somewhere I understand pretty thoroughly, would almost always enjoy a conversation with that founder, and (napkin math) looks plausibly mutually interesting. Why now and not five years ago? It feels like a generation-of-business thing: the reason everybody who made money at Google / Facebook didn't invest five years before they started investing was because they hadn't made money at Google / Facebook. Did the opportunity exist five years ago? Probably, as evidenced by the successes from that generation. Is the opportunity better now? Plausibly yes, as demonstrated by all of the people who were successful writing down what they did, doing technology transfer on that to new operators (often for free), the ecosystem radically improving (inputs, platforms, employees, exit options all got a bunch better), etc.
- lifeisstillgood 8y ago
  My apologies for leaving this tab open and not replying - it actually sparked some ideas I wanted to get into book form. There being distinct skill sets coming out of the (soon to be flooded) ex-unicorn investor market is an exciting idea as much as anything

danschumann 8y ago

This is great stuff.. I've been waiting for a VC firm for a while that wouldn't just push me to pump and dump. I'm making a company for the long haul.

gnicholas 8y ago

Do startups that raise from you tend to have other investors come on at the same time? If so, do they use similar terms or something completely different? If this doesn't happen now, would you hope that it would in the future (that is, that people would want to follow a round led by you)?

bfritton 8y ago

Love this

laser 8y ago

In principle this seems pretty cool, but the gap between what's communicated on the website, and what's actually contained in the 'Shared Earning Agreement' [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'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. 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'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. This probably seems abstract, so I'll make it vividly clear with an example. Let'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't monetized at all and paid any off, this could be a full 50% stake. 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 "$3 million" valuation could convert to a 15% equity stake in your company? I'd love to see how this could be revised to address this issue, and I'd love to see the website more clearly communicate the equity implications. As of now, I can'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't fully comprehend the terms they were agreeing to. 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 :) [1] https://docs.google.com/document/d/1MoLiH_VnhX-0vfZ1zgMSfpcIt0rdyD9rc27BbypplDI/ https://docs.google.com/document/d/1MoLiH_VnhX-0vfZ1zgMSfpcI...

hotpockets 8y ago
Would it be legal for the startup to take a loan of $800k and just pay off the remaining balance? Then EC gets their 5x, and you keep your equity? (Probably the new investors would see the advantage of this)

tobiasszarowicz 8y ago

I really like this concept. First Investors often face the follow up dilemma when they cant join a follow up round and get squeezed out with much a lower valuation. Am I right that this wont happen to you because your earning share is basically just a position on cost side? Or could that even be an obstacle for follow up rounds?