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.