"earn outs" example? example, someone

Analti_Calte

Can someone give me an example of earn outs?
I have hard time understanding the wording in CFAI and schweser. One example will do. thank you

malbec

Earn outs are used to align the interests of the venture capital firm with the interests of the managers of portfolio companies owned by the VC firm. For example, a venture capital firm may buy a portfolio company for $100 million with the agreement that additional payments of $1 million will be made to the management team for the next five years if the portfolio company exceeds agreed performance targets.

jcole21

Thank you very much the+1guy

d2rockstar

Earn outs are essentially just stock options given to the management of the company bought or invested into by PE or VC. Generally the owners of a privately held company will receive a fraction of the actual deal’s value in cash. The rest will be locked up in the form of an earn-out that, as the+1guy said, aligns the interests of both parties. The PE/VC groups do not want the owners immediately cashing out, thus leaving the business they just acquired without a senior management crew. Generally the performance figures and expectations outlined in the earn out deals are extremely high and are rarely reached. But, if the performance targets are hit then the ex-owners can make bank.