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This episode breaks down good versus bad earn-outs and why they exist, explaining that earn-outs are primarily used to protect buyers by tying part of the purchase price to future performance to reduce risks and hidden issues. It contrasts buyer benefits with seller concerns, including loss of control after handing over the business and the perceived unfairness of shifting risk onto the seller, especially when outcomes aren’t fully within their control. The script highlights scenarios like customer concentration risk and fast-changing SaaS markets where products can be quickly displaced, making escrowed or deferred payouts risky for sellers. It also shows how earn-outs can align incentives and “grease” a transaction when both sides share goals, emphasizing the importance of choosing the right KPIs (top line vs bottom line) and encouraging investors—especially early-stage—to add value through active support and aligned incentives.
00:00 Earn Outs Overview
00:37 Why Earn Outs Exist
01:53 Buyer Risk Examples
02:17 Seller Concerns
02:57 SaaS Disruption Risk
04:05 Aligning Both Sides
04:29 Investor Value Add Earn Outs
05:08 Commission Incentives Example
05:58 Pay For Performance Mindset
07:00 Negotiation And KPIs
07:26 Top Line Vs Bottom Line
08:16 Closing Thoughts For Investors
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