Earn-out is deferred acquisition consideration—extra money sellers receive only if the acquired business achieves agreed performance after the deal closes.

How it works

When buyer and seller disagree on future growth, they split the difference: upfront cash at close plus an earn-out tied to metrics over one to three years.

Example: acquirer pays $80M at close and up to $30M earn-out if the target hits 120% of projected ARR in each of the next two years. Founders may stay employed to influence outcomes—or leave, depending on terms.

Earn-out agreements define accounting methods, customer definition (same-store vs new logos), caps, floors, and dispute resolution. Working capital adjustments and buyer operational changes often trigger fights.

Venture-backed sellers funnel earn-out proceeds through the liquidation waterfall—preferred may take first, founders last.

Why it matters

• Founders: Earn-outs are notoriously litigious. Negotiate operational control during the earn-out period, clear metric definitions, and acceleration if the buyer merges or sunsets the product.
• Investors: Earn-outs extend exit timing and uncertainty. Model probability-weighted proceeds, not headline max price.
• Buyers: Earn-outs reduce overpayment risk but require monitoring and clean financial reporting from the acquired unit.

Common mistake

Accepting an earn-out on metrics the buyer controls post-close—pricing, headcount cuts, cross-sell priorities. Without contractual protections, the buyer can make targets unreachable.

Related ideas

• Escrow — another holdback mechanism
• Earnout — same concept, alternate spelling
• Earn-In — milestone-based ownership on the way in
• Indemnification — separate from earn-out, covers breaches