Hi everyone
Looking for some advice about what to do here. It feels like there is nothing straight forward in this startup journey :)
So we got offered to purchase our b2b saas platform for let’s say 1.7M now, with an earnout later. It is a great opportunity for us as they are leaders in our industry and almost completely derisk our earnout… it’s been a hard few years getting here.
The interesting part is the breakdown of funds for the 1.7M now.
Investor A invested 2 years ago with 500k, they now own approx 19pc. Investor B invested last year for 1M but said he wanted pref shares on liquidation. We never thought anything of it and put in shareholders agreement.
But… they omitted preference on sale of shares, ie preference shares. So there is no clause in our SHA covering preference for return of the first 1M back to them before the rest is split.
This means that in fact myself and cofounder do best out of this and clear about 450k each. While our investor B only gets 300k now and has to hope the earnout goes to plan, which it will! But that’s an aside.
But investor B is now arguing that he did in fact say this to us in person at the time… preference in sale or shares as well as liquidation.
We are unsure what to do, do we stick to our guns or agree some sort of compromise where we give a bit each to them?
What would or have people done here before?
at the time we barely understood what it meant to be honest and just deferred to the lawyer when it was asked for in the term sheet. the lawyer pretty much copy pasted the clause from the term sheet. Investor Bs mistake…
I will be shocked if this earnout works for you. Unless there’s a very simple and straightforward calculation that supports you, don’t expect anything
We had an earnout in our acquisition that was hit in full. In a surprise twist, the company that acquired us was, themselves, acquired before the end of the earnout period. Our acquisition agreement did not account for this possibility, but the CEO was super cool and accelerated the earnout.
Don’t be like us — make sure you include this possibility (and others, including major change of ownership, merger, bankruptcy, etc.) in your agreement. Could’ve easily screwed us and our investors if the CEO was not such a person of integrity.
thanks we are ensuring we are covered under all eventualities there (we are getting advice from expert in this area). The benefit of having the investors on the earnout is they are incentivised to bring in expertise on this.
I’m at the tail end of an earnout an on track to hit just under 50% of the theoretical max. It’s more than I thought we’d do and will be a nice chunk of change. We wrote very clear terms into our agreement.
Can confirm. Acquirer promised a significant earnout, then found ways to claim none of their revenue fell under the acquisition terms. Investors and founders got screwed.
Earnouts are good in theory, but it better be written exceedingly clearly, and you should count on spending a ton on lawyers to enforce it.
We did hit the earnout 100% but I now realise how lucky we were.
I think the earnout can work if the terms are very clear and within your control to fullfill AND you have some leverage that incentivises the buyer to pay out. In our case, the buyer did not want to sour the relationship with the acquired team so ended up paying out. Mind you not without a fight.
Earnout for founders is like options for employees: worthless until proven otherwise. It’s not a real part of your compensation, it’s a way for them to incentivize you to stay involved.
I second this. It’s fairly well-known that earnouts are almost never hit. It also happened to me in our acquisition so I can vouch, at least anecdotally.
This isn’t at the crux of your original question but worth noting: You should only take the deal if you’re happy in a scenario where you do not hit the earnout.