The Wall Street Journal article “Rise of ‘Earnouts’ Muddies M&A Waters” discusses the increasing landscape of earnout agreements in startup acquisitions. As the article states, earnout agreements are often used in order to settle differences over a company’s valuation, but are frequently leading to disputes over milestone payments. MBBP corporate partner Carl Barnes remarks that:
Concern about the potential for earnout disputes is leading startups to take proactive measures, such as creating escrow accounts to fund legal battles. Typically, funds for the escrow come off the top of the cash paid up front. If the funds are never used, they are disbursed to shareholders.”
Additional measures involve how the earnout agreements are initially structured and negotiated within the deal. For more information, read the full article.