Latest / The Series A Show with Fexingo: Early-Stage Funding, Pitch Decks, and Startup Milestones / How Startups Are Using Earnouts to Hire Top Talent in 2026
Transcript
- Lucas: So you're a startup founder, you've raised your Series A, you're growing. But the engineer you really want — the one who could build your core product — is sitting at a FAANG company making four hundred thousand dollars a year in total comp. You can't match that in cash. So what do you do? Luna: You get creative. And one of the most interesting tools I'm seeing more early-stage startups use in 2026 is the earnout. Not just for acquisitions — for individual hires. Lucas: Exactly. The earnout as a hiring tool. It's been around in M&A forever — you acquire a company, you tie part of the purchase price to future performance. But now I'm seeing more founders structure compensation packages with earnout clauses for key hires. Especially in this market where equity is volatile and cash is precious. Luna: Let's anchor this in something concrete. I talked to a fintech startup last week — they're post-Series A, about forty people. They wanted to hire a senior backend engineer from Uber. Uber's stock had a rough patch last year, but this engineer still had a lot of unvested RSUs. Lucas: Classic problem. How do you make them whole on the leave? They're walking away from a known future value. Luna: Right. So the startup offered a signing bonus — but not in cash. They structured it as an earnout: if the engineer stays for two years and hits three product milestones, they get a lump sum equal to the value of the unvested RSUs they left behind. Plus additional equity. Lucas: And the milestones were tied to things the startup actually needed — launching a specific feature, hitting a certain transaction volume, reducing latency by a certain percentage. Not vague targets. Measurable stuff. Luna: Exactly. And the earnout was paid in the startup's stock at the valuation of the next round. So if the company does well, the engineer gets upside. If not, they still get something, but it's aligned with performance. Lucas: That's the key — alignment. A well-structured earnout means the hire only gets the full payout if the company succeeds. It's not just a golden handcuff, it's a performance incentive. And for the startup, it preserves cash. Luna: And I think the reason we're seeing more of this now is the market dynamic. Look at the data we pulled today — Coinbase up almost 10 percent in the last five days, Palantir up, Shopify up. Growth stocks are hot again. But early-stage startups still can't compete on cash salary. Lucas: Right. The public market rally makes equity in a private company feel more speculative. So an earnout that promises a cash-equivalent if milestones are hit — that bridges the gap. It's partly guaranteed, partly at-risk. Luna: And there's a negotiation dance. The engineer wants the earnout to be as certain as possible — shorter timeline, easier milestones. The founder wants it to be truly performance-based. So both sides end up defining success criteria very carefully. Lucas: That's actually good discipline. It forces the founder to think: what does success look like in the next 18 months? And it forces the hire to ask: do I believe these milestones are achievable? If the answer is yes, you've got a real partnership. Luna: But there are risks. If the milestones are too aggressive and the engineer misses by a hair, you've got a disgruntled employee who feels cheated. Or if the earnout is too easy, you're just giving away equity without real performance. Lucas: And there's a cultural risk too. If you have one person on an earnout and everyone else is on standard equity, it can create resentment. You need to be transparent about how compensation works, otherwise you'll have people comparing packages at the water cooler — or Slack, whatever. Luna: So what's the rule of thumb? When should a founder consider an earnout for a hire? Lucas: I'd say when the hire is truly mission-critical — someone who can single-handedly change the trajectory of the product or the business. And when the cash to equity gap is too wide to close with a normal offer. If you're hiring your first VP of Engineering or your lead data scientist, that's a candidate. Luna: And for the candidate — what should they look for? The earnout should have clear, objective metrics. Not 'improve user experience' but 'reduce checkout abandonment by 15 percent.' And make sure the earnout is tied to something you can actually influence. Lucas: Also check what happens if the company gets acquired before the earnout vests. Is it accelerated? Does it convert to cash? That's a common point of contention. You want to define that upfront. Luna: And speaking of acquisitions — SpaceX finally went public today. Their IPO raised $85.7 billion, which is just staggering. For startups, that kind of exit is the dream. But for a founder thinking about earnouts for hires, it's a reminder that if your company does hit big, those earnout agreements can become very expensive. Lucas: Which is why you need a good lawyer and a thoughtful cap table model. An earnout that seems reasonable at a $50 million valuation could be a huge liability at a $5 billion valuation. You want to cap the upside in a way that's fair but doesn't blow up your capitalization. Luna: I'd love to see more data on how common earnout hiring actually is. My sense is it's still niche, but growing. And it makes sense for a specific kind of hire at a specific stage. Lucas: We should do a follow-up with an employment lawyer who structures these. But for now, I think the takeaway is: if you're a founder competing for top talent, don't just think about salary and equity. Think about a performance-based earnout that aligns incentives and preserves cash. It might be the edge you need. Luna: And if you're a candidate, treat it like a venture investment. Do your due diligence on the milestones and the company's ability to hit them. Lucas: Yeah. And honestly, if this episode was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. It keeps the show ad-free and independent. Luna: Agreed. And if you're building something, these conversations are meant to be useful. That support lets us keep doing them. Lucas: Alright. So let's talk about another way companies are getting creative with compensation — because it's not just earnouts for hiring. Some startups are now offering earnouts for retention, too. Luna: Oh interesting. Like a stay bonus that's tied to performance? Lucas: Exactly. Instead of a standard four-year vest with a one-year cliff, some companies are offering a two-year earnout that pays out if the employee stays and the company hits a revenue target. It's like a retention bonus but it's contingent on business success, not just time served. Luna: That could be a great tool for keeping key people through a tough period. If the company needs to hit a milestone to unlock the next round, the earnout gives everyone a reason to push. Lucas: Right. And it avoids the problem of paying retention bonuses that don't correlate with performance. If the company misses its targets, you haven't wasted cash on retention that didn't produce results. Luna: But again, you have to be careful. If the targets are too hard, people might leave anyway. Or if they're too easy, you're overpaying. Lucas: That's the art of it. You need to calibrate to the specific role and the specific company situation. There's no one-size-fits-all. But I think we'll see more experimentation as the talent market stays competitive. Luna: Agreed. And as the IPO window opens up with SpaceX and others, more employees will be thinking about liquidity. Earnouts could be a way to bridge the gap between private company equity and public market certainty. Lucas: Great point. So whether you're hiring or staying, the earnout is a tool worth understanding. We'll dig deeper in future episodes. Luna: Sounds good. Until next time, keep building.