Exits & Liquidity
Earnout
A contingent payment in an acquisition where the seller receives additional compensation if the acquired company meets specified performance targets after closing.
An earnout is a provision in an acquisition agreement where part of the purchase price is deferred and paid only if the acquired company achieves specified performance milestones after the deal closes. Earnouts are typically used to bridge valuation gaps: the acquirer is willing to pay a higher price if the company performs as the sellers claim it will, but wants protection if it doesn't.
Earnout targets are typically financial (revenue, EBITDA, ARR milestones), product-based (specific feature releases), or customer-based (contract renewals). The earnout period usually spans 1–3 years post-closing.
Earnouts can create significant post-acquisition conflict. Founders may feel the acquirer is intentionally limiting their ability to hit targets by restricting resources, changing strategy, or reorganizing the team. Poorly structured earnouts are a major source of post-M&A dysfunction.
In Practice
A healthcare software startup agrees to be acquired for $30M upfront plus up to $20M in earnouts if revenue exceeds $5M in year 1 and $8M in year 2 post-acquisition. The founders stay on to run the business unit and hit their targets — earning the full $20M earnout over two years.
Why It Matters
Founders negotiating acquisitions should scrutinize earnout structures carefully. The headline acquisition price often includes earnout amounts that are difficult to achieve — the real question is: what's the floor (guaranteed) amount, and are the earnout targets fair given what the acquirer plans to do with the business?