What an Earn-Out Actually Feels Like

He sold his company for what looked like a good headline number. A third was paid on closing. A third would be paid twelve months later if the company hit its annual recurring revenue target. A final third came at month 24, contingent on maintaining the customer retention rate above a specified threshold.

The earn-out was designed around metrics he could influence. That mattered enormously.

In the 18 months after closing, the new parent company changed the product roadmap twice, replaced his head of sales, and moved the customer success team to a shared services model. The earn-out targets survived two of those three changes. The third — losing his sales lead at month 14 — put the month-24 retention threshold at risk.

He hit it, narrowly. What he learned was that earn-outs work when the targets are simple, measurable, and within the seller's control after the transaction closes. They fail when any of those three conditions is missing.

The metrics used in his earn-out — annual recurring revenue and customer retention rate — were both things he could directly influence even after the acquisition. He kept his customer relationships. He maintained the renewal process himself. He absorbed the account management work that the new parent's restructuring had disrupted.

The earn-out targets that fail most often are the ones tied to growth metrics in markets that the new parent then changes strategy on, or to retention metrics on customer segments the new parent immediately tries to upsell into different products.

Once the letter of intent is signed and exclusivity begins, the founder's leverage drops sharply. The earn-out terms you accept at that point are the ones you will live with for two years. Negotiate them before you need to. The time to discuss earn-out structure is before you have a signed LOI — not after.