Part of the price paid later, only if the business hits agreed targets. It bridges a disagreement about what the company is worth, and it is the most frequent source of post-deal argument — which is why how the target is measured matters as much as its size.
Why it matters
An earnout exists because the two sides disagree about what the company is worth, and neither
can prove it. The seller is pricing the business it is about to become; the buyer is pricing the
business it can see. Rather than split the difference and both feel robbed, they agree that part
of the price depends on what actually happens next.
That makes it the most useful tool in a negotiation and the most common source of trouble after
it. For a founder, an earnout can be the difference between a deal at a disappointing number and
a deal at the number you believe in — but only if the target is one you can still hit inside
someone else's company. For a buyer, it moves real risk off the cheque and onto the outcome,
which is exactly what it should do.
The part people underestimate is that an earnout does not end the negotiation. It postpones part
of it, and reopens it later, on terms written when everyone was still friendly. In AI companies
this bites harder than usual: revenue quality is genuinely difficult to assess, models and
pricing change quickly, and a buyer who intends to fold your product into theirs may reorganise
the very thing your payment is measured against.
How it works
An earnout has four moving parts, and every one of them is negotiable.
What is measured. Revenue is the most common, because it is the hardest number to argue
about. Gross profit and earnings shift more of the operating risk onto the seller — reasonable
if you still run the business, much less so if you do not. Non-financial milestones (a product
shipped, a certification obtained, a named customer signed) are cleaner to verify and cannot be
diluted by an accounting decision.
Over what period. Long enough that the result means something, short enough that the business
is still recognisably the one you sold. Beyond a couple of years, the number usually says more
about the buyer's decisions than yours.
On what scale. A cliff pays in full above a threshold and nothing below it, which turns a
narrow miss into a total loss and gives both sides a reason to fight over a rounding error. A
sliding scale pays proportionally, and removes most of that pressure. Sliding scales settle more
quietly.
How it is calculated and by whom. The buyer owns the accounts after closing, so the mechanics
matter as much as the target: which revenue counts, how it is recognised, what happens to
contracts sold by the buyer's own team into your customers, and who resolves a dispute.
Alongside those sits a fifth question, and it is the one that decides whether the rest holds up:
what the buyer is obliged to do, and not do, while the clock runs. An earnout with no covenants
protecting it is a promise the buyer can lawfully make worthless.
What to watch for
The target is measured inside a company you no longer control. This is the whole risk in one
sentence. A buyer who reprices your product, moves it onto their paper, redirects your sales team
or merges your entity into a bigger one may do every one of those things for perfectly good
reasons — and make your target unreachable in the process. Ask for covenants: to run the business
substantially as before, to keep the accounts separable, to leave pricing and sales resourcing
broadly intact, and to give you the information to check it.
Agree the definitions, not just the number. "Revenue" is not a shared word. Does it include
revenue the buyer's team sells into your accounts? Renewals booked before closing? Deferred
revenue recognised after it? Every one of those is a real argument that has been had before, and
writing them down while everyone still wants the deal costs nothing.
Decide who resolves a dispute before you have one. An independent accountant named in the
agreement, with a defined process and a deadline, converts what would be a lawsuit into a bill.
Watch what the earnout does to your leverage. Once you have signed, you have handed over the
company and kept an unsecured claim on a number the other side computes. If the earnout is a
large share of the price, you are effectively a creditor of your own buyer without a creditor's
protections.
And be honest about what happens if you leave. If your continued involvement is what makes
the target achievable, an earnout paired with a short notice period is not a price — it is a
retention package that can be walked away from by either side.
On GetDeal
Price and structure are negotiated in the deal room, where both sides see the same stage and the
same outstanding items — the offer stage is where an earnout is proposed, and the legal stage is
where its definitions get written down. Because the stage tracker is shared rather than reported,
neither side is guessing about where the other thinks the deal is.
The Playbook sets out the stages a deal moves through and which agreement is signed at each one,
which is worth reading before you negotiate a structure whose consequences land two years after
closing.
Raise or sell your AI startupthe Playbook — the deal stages, what each one unlocks, and which agreement is signed when
Questions people ask
- What is an earnout in simple terms?
- It is part of the purchase price that is paid later, and only if the business hits targets both sides agreed in advance. The buyer pays some of the price at closing and the rest depends on what the company actually does over an agreed period, so a disagreement about what the business is worth is settled by the results instead of by argument.
- How long does an earnout usually last?
- Long enough for the result to be meaningful and short enough that the business is still recognisably the one that was sold. The longer it runs, the more the outcome reflects the buyer’s decisions rather than the seller’s, which is the reason both sides tend to prefer shorter periods once they have thought it through.
- What is the most common reason earnouts end in a dispute?
- The target is measured inside a company the seller no longer controls. The buyer reorganises the sales team, changes pricing, moves the product onto its own contracts or merges the entity, and the number the payment depends on stops being reachable. The defence is covenants about how the business is run during the earnout period, and clear definitions of what counts toward the target.
- Should the earnout be measured on revenue or profit?
- Revenue is harder to argue about, because it depends on fewer judgements. Profit shifts operating risk onto the seller, which is only fair if the seller still runs the business day to day. If the seller is leaving, a revenue or milestone measure is usually the more honest choice, since it depends less on decisions they will not be making.
See also
More in Deal structure
- Asset purchase — The buyer acquires chosen assets — code, customers, brand, sometimes staff — rather than the company.
- Cap table — The register of who owns what: shares, options, convertibles and the terms attached to each.
- Escrow — Part of the price held by a neutral third party for an agreed period, available to the buyer if the seller’s promises turn out to be wrong.
- Liquidation preference — The right of certain investors to be paid before ordinary shareholders when the company is sold.
- Rollover equity — The seller keeps a stake in the business under its new owner instead of cashing out fully.
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Updated 2026-09-09