The deal is worth $1.5 million with $1 million guaranteed at the time of signing, per a league source.
710 ESPN Seattle was first to report the Seahawks' agreement with Shead.
Shead started 15 games opposite Richard Sherman last season and played at a high level, but he suffered a torn ACL and meniscus in his left knee in the divisional round of the playoffs.
He finished last season with an interception, forced fumble and 14 passes defended.
Shead was originally a restricted free agent, but the team did not tender him, making him an unrestricted free agent. He took a free-agent visit to the Buffalo Bills but is returning to Seattle.
Seahawks general manager John Schneider said at the combine that Shead would have a hard time being ready for the start of the 2017 season, but coach Pete Carroll said Shead had a chance to return for Week 1.
"DeShawn is a great kid. He's got really strong faith," Schneider told reporters. "You'd want him to be your son -- you know what I mean? His mindset is like, 'Hey, I'm going.' I say he's probably not going to be there right away; that's just me. He's probably got a different mindset. He's crushing his rehab right now."
Shead, 28, began his career on the Seahawks' practice squad before working his way into a starting cornerback role in 2015. He also served as Seattle's special-teams captain last season.
When healthy, Shead will have a chance to compete for the starting cornerback job.