Cash, stock, earnouts and escrow

The press number is a bundle. Inside it sit cash, acquirer stock, earnouts, escrow and retention. Each piece has different risk. Employees who need liquidity usually prefer cash at close. Everything else transfers uncertainty to the seller.

The big idea

A stock purchase (or forward merger) buys the company's equity; assets, contracts and liabilities generally travel with the entity. An asset purchase lets the buyer pick specific assets and assumed liabilities; the selling entity may liquidate afterward. Asset deals can be cleaner for buyers (leave unwanted liabilities behind) and messier for sellers (tax, contract assignments, leftover shell).

Then comes how you get paid:

Walking through the fragile bits

Earnouts bridge a valuation gap when buyer and seller disagree on the future. They pay extra if the acquired business hits revenue, product or integration milestones. Definitions get gamed. The product gets deprioritized. The team that must hit the number no longer controls the roadmap.

Escrow is often about 10% (sometimes more) for 12–24 months, covering breached reps, IP issues, tax surprises. It is usually shared across selling shareholders per the waterfall — not a founders-only pot.

Retention is especially large in acquihires. A big fraction of "deal value" vests only if you stay (often 1–4 years). Headlines that blur retention with purchase price systematically overstate what equity holders received.

Mixed deals are common: part cash at close, part stock, part contingent. If paid in buyer stock, understand lockups, registration and concentration risk.

Common mistakes

• Adding earnout + retention + escrow into "the price." Only cash (and stock you can sell) that clears the waterfall is equity proceeds.
• Taking a large earnout because the headline looks better. You no longer control the product.
• Forgetting escrow is real money at risk for a year or two after the party.

Check yourself

The deal is "$40M" with 10% escrow. How much is parked for indemnity claims?

$4M, typically for 12–24 months.

Why prefer a smaller cash number to a larger earnout?

The acquirer controls whether the milestones are reachable once they own the roadmap.

Key takeaways

• Structure (stock vs asset, cash vs stock) changes tax, liability and liquidity.
• Earnouts and buyer stock transfer risk to sellers.
• Escrow is a delayed, at-risk slice of the same waterfall.
• Retention is pay for staying, not a reward for old options.

Further learning

Next: the acquisition waterfall.