In down rounds or sub-par exits, it would not be unusual for the the parties to negotiate a different outcome no matter what the agreements say. For example, if the acquisition value, including earnout, would have been less than $1M, and the last investor insisted on preference of $1M, you would have no (financial) incentive to stay on with the company. If the founders walked way, the deal would be dead and the last investor would get zilch.

In your place, first I would have your lawyer and the investors lawyers concretely establish what the shareholder agreement says - which is that there is no preference. Assuming you want to be fair to the last investor, from that starting point you negotiate what every one gets - which would be somewhere between $300K and $1M. For example, you could offer to buy back their shares somewhere in that range as a compromise.

I am surprised that the earn outs would be paid out to the investors - generally they are paid to the employees who stay on. Are you sure it is not some sort of escrow which will be released contingent to some terms?

Obviously it is your choice if you don’t want this customer and others have already provided suggestions on how to frame your response politely.

But consider that some buyers are first time buyers of a service. May be had a sticker shock since they did not know what to expect, tried to understand why it costs what it costs by deconstructing the quote, you provided an explanation, they vetted it out by talking to few other vendors, and have come to trust your explanation, and therefore want you for the job.

By similarly educating some newbie customers, we have converted many of them into repeat customers.

Not sure if your business lends itself to repeat customers, but you can write this up to the cost of customer acquisition.