Founder’s Earn out | Startup | Sarthak Ahuja

Founder Earn Outs on Startup Acquisition

When your startup is acquired, the acquirer may offer to buy your business in an earn out model.

He would say, okay, we’ll give you 40% of the total price of the business today… and the remaining 60% will be earned by you over the next 2 years if you achieve the following targets.

Your targets could be linked to achieving X revenues, maintaining profits above Y%, etc

It sounds extremely reasonable from the point of view of the acquirer and of course they’re justified in saying so.

But know that once an acquisition is made, in most cases, the culture of the organisation changes, the decision makers change, and the environment is no longer as simple as it was earlier to help you achieve your targets.

Plus, incentives are misaligned, where you just want to hit your revenue targets at whatever cost because you want to take home your earn out, and other areas like the brand may take a beating.

So if your business is getting acquired, please try and not keep more than 25% of your payout as an earn out, and maximise your cash earn out today, even if it means negotiating for a lower overall consideration.

This is generic advice but holds in most acquisition cases.
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A Chartered Accountant with about 10 years of experience in areas of Tax Advisory, Startup Consulting, Fundraising, Audits, Deal Advisory, Business Modelling and contract CFO services.

Winner of the ISB Young Leader Award 2017 and the Best All Rounder, PGP Class of '17, Sarthak has also been published about in the leading financial newspapers such as The Financial Express as possibly the youngest Indian to have completed the courses of CA, CS and CMA along with a graduate degree in Financial & Investment Analysis from University of Delhi, all by the age of 23 years.

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