---
title: "What Is Escrow?"
term: "Escrow"
description: "Escrow holds a portion of deal proceeds with a third party until conditions are met—covering indemnity claims, earn-outs, or post-close adjustments in M&A and some financings."
date: 2026-07-25T00:00:00.000Z
updated: 2026-07-25T00:00:00.000Z
topics: ["venture-capital"]
source: https://venturecapitaltracker.com/glossary/escrow
---

# What Is Escrow?

> Escrow holds a portion of deal proceeds with a third party until conditions are met—covering indemnity claims, earn-outs, or post-close adjustments in M&A and some financings.

**Escrow** is a neutral third-party account that temporarily holds funds from a transaction until specified conditions clear—most common as a holdback in acquisitions.

## How it works

In a stock purchase agreement, the buyer may withhold 5–15% of purchase price (varies by deal) in escrow for 12–24 months. Purpose: backstop **seller indemnities**—breaches of representations about IP, financials, contracts, or litigation.

If a claim arises (e.g., undisclosed tax liability), buyer notifies escrow agent; disputed amounts follow resolution procedures. Unclaimed escrow releases to sellers at term end.

Escrow differs from [earn-out](/glossary/earn-out) (performance-contingent) though both delay cash. Some deals combine both. Venture rounds occasionally use escrow for milestone tranches or disputed closing conditions.

Example: $100M acquisition, 10% escrow ($10M) for 18 months. Founders receive $90M at close; $8M releases at month 18 with no claims; $2M paid to buyer for a customer contract breach found post-close.

## Why it matters

- **Founders:** Escrow hits personal and investor proceeds unevenly depending on waterfall and **recourse** caps. Negotiate baskets, deductibles, and survival periods for reps.
- **Investors:** Preferred may receive escrow proceeds first; disputes between buyer and seller drag liquidity.
- **Buyers:** Escrow substitutes for chasing sellers after close—critical when founders leave.

## Common mistake

Assuming escrow always returns in full. Material rep breaches—even disputed ones—can tie up funds in legal process. Budget taxes and personal plans on net-at-close cash, not gross headline.

## Related ideas

- Indemnification — legal promises escrow backs
- [Earn-Out](/glossary/earn-out) — performance-linked deferred pay
- [Enterprise Value Bridge](/glossary/enterprise-value-bridge) — escrow as deduction
- Rep and warranty insurance — alternative to large escrow

## FAQ

### What is Escrow in simple terms?

Part of your sale price sits in a secure account for 12–18 months. If the buyer wins a claim you breached reps, they take money from escrow; otherwise it releases to you.

### Why does Escrow matter?

Escrow reduces buyer risk after closing. Founders net less cash day one and may lose escrow on indemnity disputes—size and carve-outs are heavily negotiated.


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Source: https://venturecapitaltracker.com/glossary/escrow