Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Structured Payouts to Turn Earnouts into Real Money
Transcript
- Lucas: You know, we've talked a lot about earnouts on this show — the trap, the bridge, the SPAC version — but there's one question I keep hearing from founders who've actually signed one of these deals: how do I make sure I actually get paid? Luna: Right, because signing an earnout and collecting it are two very different things. I've seen numbers suggesting something like 40 percent of earnout targets never convert. Lucas: Yeah, and that's the generous estimate. A study from SRS Acquiom a couple years back found that in M&A deals with earnouts, only about 60 percent of targets were met. And for SPAC deals, that conversion rate drops even further. So the question is: what separates the earnouts that pay out from the ones that become accounting footnotes? Luna: Let's start with the most common killer: vague milestones. I remember the Agility Robotics deal we covered a few episodes ago — their SPAC earnout was tied to hitting certain revenue targets, but the definition of 'revenue' left room for interpretation. Lucas: Exactly. If the earnout says 'the company must achieve $50 million in revenue by year three,' but the acquirer can reclassify what counts as revenue — deferring recognition, excluding certain product lines — you've basically signed a promissory note that the other party gets to edit. The fix is to define milestones as specifically as possible. Tie them to standalone product revenue, not to synergies or combined entity figures. Luna: And don't just say 'revenue.' Say 'net revenue from Product X, calculated using GAAP, with no changes to recognition policy post-close.' Lucas: Right. Another big one: timing. A lot of earnouts are structured as annual targets. But if you miss the first year by a small margin, you might lose the entire year-one payout. And the acquirer knows that — they can slow-walk integrations or delay product launches. So quarterly targets are better. They give you four chances to hit a checkpoint instead of one. Luna: And each quarter is smaller, so a miss doesn't wipe out a huge chunk. That changes the incentive for the acquirer too — they can't just let the first year slide and then claim the earnout fails. Lucas: Exactly. Now, let's talk about non-compete clauses. I've seen earnouts where the founder has to stay on as an employee and maintain a non-compete. If the acquirer fires you without cause, you're still bound by the non-compete but you lose control over the earnout. So you need a clause that says if they terminate you without cause, the earnout accelerates or is paid out in full. Luna: That's a big one. Also, change of control. If the acquirer sells the company before the earnout period ends, what happens? Without an acceleration clause, your earnout could get transferred to a new owner who has no incentive to hit the targets. Lucas: So you want a provision that says upon a change of control, the earnout is either paid immediately or converted into a guaranteed payment. That's standard in good lawyered deals, but surprisingly many founders don't push for it. Luna: And one more: accounting contingencies. Sometimes the earnout is structured as additional consideration that's contingent on future events. Under GAAP, that can be classified as a liability that gets marked to market. If the acquirer's stock price drops, the value of the earnout can shrink even if you hit the targets. Lucas: Yeah, that's a nasty one. The fix is to structure it as a fixed cash amount or a fixed number of shares, not a variable formula tied to the acquirer's stock. Or, if it's shares, make sure there's a collar or a floor. Luna: So let's ground this in the current market. We're sitting here on June 28, 2026. Rivian is trading around $15.63, down from its highs. Palantir around $112, but volatile. In this environment, buyers are more risk-averse, so they're pushing earnouts harder. Founders need to be ready. Lucas: And here's the thing: if the market is uncertain, earnouts become more common. According to SRS Acquiom, in 2025, about 28 percent of private M&A deals had earnouts, up from 22 percent the year before. So this is a growing trend. Founders who understand the mechanics have a real edge. Luna: If this episode is giving you practical tools you can use in your own negotiations, that's exactly why we do this show ad-free. If you find value in that, the simplest way to keep it going is a small gesture at buy me a coffee dot com slash fexingo. Just a way to say this matters to you. Lucas: Absolutely. No pressure, but if it helps, think of it as the cost of a coffee for each episode that actually saves you from leaving money on the table. Alright — back to structuring. One more key point: earnout duration. Most earnouts run two to three years. But the longer the earnout, the more chances for things to go wrong. I'd argue for a maximum of two years, with the first payout at 12 months. Luna: And if the acquirer insists on three years, ask for a catch-up provision. If you exceed the target in year one, let that surplus roll over to cover a potential shortfall in year two. Lucas: That's a good one. Also, consider tying part of the earnout to a metric the founder can directly influence. If you're the CEO of the acquired unit, you want the earnout tied to your unit's performance, not the entire corporate P&L. Otherwise, the acquirer's other divisions could drag you down. Luna: Right. And push for a 'most favored nation' clause: if the acquirer later offers better earnout terms to someone else, yours get upgraded automatically. Lucas: That's rare but worth asking for. Look, at the end of the day, an earnout is a bet on the future. You're trading some upside now for potential upside later. The goal is to make that bet as fair and enforceable as possible. Founders who go in with a checklist — specific milestones, quarterly targets, acceleration clauses, fixed payout — are the ones who actually collect. Luna: And if you're listening and you're about to sign an earnout, get a lawyer who has done this before. Not just any M&A lawyer — one who's been through earnout disputes. The difference in outcomes is massive. Lucas: Yeah. A good earnout lawyer can negotiate protections that double your chances of getting paid. It's worth the fee. So, to sum up: be specific, be quarterly, be protected on non-compete and change of control, and get a specialist. That's how you turn a piece of paper into real money.