Write the earnout on what the acquired team still controls

An earnout moves a disagreement about price into an integration plan the buyer controls.

It loses value when its metric sits on something the acquired team stops controlling at closing. The buyer sets list price and discount authority, decides which reps carry the product, folds the roadmap into a platform release, allocates shared support and engineering cost, and controls the systems that record revenue against the agreement. Each decision can be defensible on its own. Together they can move the earnout number further than operating performance does. Two quarters after closing, the founder can be arguing about a cost allocation instead of selling anything.

Before negotiating the amount, write down the dependencies.

For a product acquisition with a sales cycle that fits inside a year, I would use the simplest measure tied to work the acquired team still runs: bookings on the existing product line at existing prices, renewals inside the acquired base, units shipped, or a milestone with a written acceptance test. The farther down the income statement the metric sits, the more accounting choices it absorbs. Contribution margin needs an allocation policy; EBITDA needs several. Then name the decisions that require the seller’s consent while the earnout is live, including repricing, retiring a SKU, moving the sales team off the product, and reassigning the engineers listed in the plan. Use twelve or eighteen months when the sales cycle fits inside that window. Longer regulatory or development milestones need their own clock.

The contract has to carry those constraints. In Lazard Technology Partners v. Qinetiq North America Operations, the Delaware Supreme Court enforced an agreement that left the buyer free to run the business as it chose unless it acted with intent to reduce the earnout. The seller had sought broader post-close obligations, but the buyer rejected them.

If payment stops when the founder leaves, it is doing retention work as well as price work. Put the retention amount in a separate agreement tied to employment, state the amount, and let the acquired team read the terms without building a model.

A selling board should be able to approve the transaction on the consideration paid at closing. If the upfront consideration cannot support the sale on its own, the earnout is carrying too much of the price.

If the buyer will not write the operating constraints into the agreement, discount the earnout before comparing it with cash at closing.