Why a Startup’s Sale Price Can Depend on What Happens Next
An earnout makes part of an acquisition payment conditional. Instead of settling the entire price at closing, the buyer pays an initial amount and promises additional money if the company meets agreed targets during a later period. Those targets might involve revenue, profits, customer retention, or a product milestone.
The arrangement can bridge a valuation gap. A founder may believe the business is about to grow quickly; a buyer may see that growth as uncertain. An earnout lets the founder receive more if the optimistic case comes true, while limiting what the buyer pays if it does not.
The Target Is Only Half the Deal
The measurement rules matter as much as the target. Revenue may be relatively straightforward to track, but profit can depend on how the new owner allocates costs. Even a seemingly clear goal can become contentious if the buyer changes prices, staffing, budgets, or the company’s place in a larger business.
That is why the contract needs to define the measurement period, the calculation, and what decisions the buyer can make while the earnout is running. Without clear terms, both sides may later disagree about whether the business missed its goal—or whether the buyer’s choices helped cause the miss.
A Delayed Payment Can Mean a Longer Job
Buyers may also want a founder to stay involved after the sale. The founder’s knowledge and relationships can help keep employees, customers, or a product on course. But when a founder’s extra payment depends on future performance, the founder may have to keep working to earn money they expected as part of the sale.
An earnout therefore trades certainty for the chance at a larger payout. The founder gets a path to prove the business’s value, but some of the sale proceeds remain exposed to targets—and, in practice, to decisions made by the new owner.
