Earnouts: Guaranteed Cash vs. Deferred Payout

You are reading a term sheet where the headline price looks like one number, but the money arrives in pieces. In life sciences deals, the median earnout was about 61% of total consideration. For a startup, the rule is the same: cash at close is the only guaranteed money, and the earnout is risk-adjusted upside: target times the chance you will hit it.

An earnout is deferred payout tied to post-closing milestones. The payout can depend on revenue, product metrics, customer retention, or a regulatory milestone that the buyer now controls. Separate the guaranteed part from the performance part.

A headline price can hide a range

In private pharmaceutical deals, earnouts appear in more than 80% of transactions in recent years. Outside life sciences, earnout usage rose from 15% in 2019 to 30-37% in 2023, then fell to about 22% in 2024. In 2024, the median earnout outside life sciences equaled 31% of closing payments, including escrowed amounts, compared with 34% in 2023 and 30% in 2022. A startup acquisition usually arrives as a mix of cash at close, escrowed amounts, and performance-based payout.

The payout bridge belongs before you sign

A payout bridge turns the headline price into a number you can live with. It puts cash at close, the earnout target, probability, window, escrow, and vesting on one page. Start with the guaranteed cash, add the expected earnout, then subtract amounts that may never reach you. Keep the lines separate so you can clearly see which part is certain and which part is conditional.

• Cash at close: Write down the single line item that arrives at signing, before any milestone. A term sheet that bundles equity, cash, and deferred payments needs to be separated now.
• Earnout target: Isolate the maximum deferred amount and the metric that triggers it. In some business sales, an earnout can represent up to 25% of the purchase price. Revenue targets need a control question: who controls pricing, sales coverage, and product roadmap?
• Probability of hitting milestones: Convert the target into a chance of hitting each milestone, not a yes or no. Do not use the target as the expected value. Buyer control over the inputs lowers the probability.
• Measurement window: Check the start date, end date, and the party that controls the data. For non-life-sciences deals, the typical performance window is 24 months. Earnout targets may be measured over a set post-closing window, commonly one to five years.
• Escrow and withholding: Subtract amounts held back for legal claims, taxes, or disputes. Escrow inside the closing payment is not free cash.
• Vesting impact: Map whether unvested equity converts, accelerates, or is forfeited. Accelerated vesting changes the payout bridge because more shares may become cash at close.

The guaranteed slice drives real decisions

Use the guaranteed cash for decisions you need to make soon. Use the expected earnout for decisions you can wait on.

For employees, unvested shares can convert into cash at close, earnout rights, or be forfeited. The conversion changes the bridge: cash at close raises the guaranteed number, earnout rights tie upside to milestones, and forfeited shares push risk into the deferred slice.

Escrow is not spendable until it is released. Treat it as cash only after that date, not before.

A large deferred slice should not drive your personal plan. Build a budget on the guaranteed cash, then treat the expected earnout as extra money that may come later. Customer-retention milestones need an ownership question: who owns the customer relationship after closing? Changes by the buyer to support, pricing, or product can move the metric without your help.