An earnout is part of the purchase price paid later, if the company hits targets after you've stopped controlling it. It converts a price you agreed into a price you have to earn.
We don't use them, which is a position rather than a neutral view. That said, the discount maths below is standard, and you can apply it to any offer you receive from anyone.
Set the shape of an offer and see what it's worth in today's money, discounted for the probability of the targets being met and the time you'd wait.
Probability figures are the ones buyers and advisors use as rules of thumb, not a guarantee. Earnouts tied to revenue pay out more often than earnouts tied to profit, because profit can be reallocated by the new owner.
The headline overstates the deal by around a fifth. Ask the buyer to convert some of the earnout into cash at close, even at a discount. Most will trade a lower total for certainty on their side too. Revenue targets are the most objective and the most likely to pay.
Earnouts are not automatically bad. Badly drafted earnouts are. Six terms decide whether yours pays out, and all six are easier to get into the letter of intent than the purchase agreement.
Revenue recognized how, over what period, excluding what. A single undefined word here is worth more than every other negotiation on the page.
Commit the buyer to a minimum spend on sales and engineering. An earnout you can't hit because the budget was cut is not an earnout, it's a discount.
If you're responsible for the target, you need authority over pricing, hiring and roadmap in the earnout period. Otherwise you're accountable for someone else's decisions.
If the buyer sells the company, reorganizes it, or terminates you without cause, the earnout should pay in full immediately. Without this, the buyer holds an option to remove you before it vests.
The right to inspect the numbers the payout is calculated from, with a defined dispute process. You'd be surprised how often this is left out.
Twelve months beats twenty-four, and twenty-four beats thirty-six. Every additional month is another chance for something outside your control to move the target away.
A portion of the purchase price paid after closing, conditional on the company hitting agreed targets. It bridges a valuation gap: the buyer won't pay the seller's number today, and offers to pay it later if the business performs.
Curious is a long-term holding company that buys and grows software companies with empathy.
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