A founder I worked with two years ago sold his vertical-software company to a strategic buyer for a mix of cash at closing and a three-year earnout tied to the post-closing performance of his business line. The closing went smoothly. The buyer integrated the business respectfully. Year one milestones came in above target. Then, eight months into year two, the buyer itself was acquired by a larger platform — a roll-up sponsor with a thesis about consolidating the category and ripping out the brand and the management team that had been running it.
The founder called me the week the deal was announced. He wanted to know what happened to his earnout. The answer turned out to be considerably worse than he expected, because the merger agreement we had negotiated two years earlier had what is now a fairly common default provision: change of control of the buyer is not, by itself, an acceleration event. The remaining two years of earnout would continue to run against the post-closing performance of the business as it existed under the new owner — an owner that had explicitly announced an intention to rebrand and reorganize the business line his earnout was measured against.
The provision had been in the agreement for a reason, and the reason had seemed defensible at the time. But sitting with the founder eight months into year two, watching the acquiring sponsor file its 8-K, I had to walk him through how the default had created a double-sided exposure that he had not been priced for at signing.
What the standard “no acceleration” default actually says
The typical earnout clause in a strategic acquisition recites that the earnout will be paid based on the post-closing performance of the business measured against agreed-upon milestones — revenue, EBITDA, product launches, customer count, whatever the parties chose. The agreement then addresses what happens if the buyer is itself acquired during the earnout period. The seller-friendly position is that any change of control of the buyer triggers acceleration: the remaining earnout payments come due immediately, either at their full target value or at some discounted present value. The buyer-friendly position is the inverse: no acceleration, the earnout continues to run against actual performance, and the seller’s recovery depends on whether the new owner hits the milestones.
The market default in middle-market strategic deals has drifted, over the last several years, toward the buyer-friendly position. The reasoning a buyer’s lawyer gives at the negotiating table is that the buyer should not be locked into a discounted-cash-payment obligation that gets triggered by an external corporate transaction the founder neither controls nor benefits from. That reasoning is logical from the buyer’s seat. It is also, from the founder’s seat, incomplete in a way that does not fully reveal itself until the change of control actually happens.
The double-sided exposure the default creates
The first side of the exposure is the obvious one. The founder’s earnout, post-buyer-change-of-control, is measured against the performance of a business that is no longer being run by the people who priced it. The new owner has its own thesis. It may rebrand the product, consolidate it into a larger platform offering, reassign the salesforce, eliminate the standalone P&L that the earnout milestones depend on, or simply manage the business with a different operating discipline. Every one of those decisions is, in the abstract, the new owner’s prerogative as the company’s controlling stockholder. But every one of those decisions also runs through the earnout milestones in ways the founder did not bargain for.
The implied covenant of good faith and fair dealing reaches some of this. Delaware has been clear, in cases including the 2024 Chancery decision in Shareholder Representative Services v. Shire and the longer line going back to Winshall v. Viacom International, that a buyer cannot deliberately structure the post-closing business to avoid earnout milestones. But “deliberately structure to avoid” is a high standard, and the implied covenant is a poor substitute for an express provision. What founders learn, post-closing, is that any business decision the new owner makes that incidentally tanks the milestones — and that has a plausible business justification on the new owner’s side — is essentially unrecoverable.
The second side of the exposure is the one most founders do not see at all. When the buyer is itself acquired, the acquiring sponsor or strategic almost always wants to renegotiate the earnout. They will offer some lump-sum payment to close out the remaining obligation. The number they offer is computed off the assumption that the milestones will not hit under the new operating plan — which is to say, off the assumption that the founder has very little leverage, because the next two years will look like the eight months that just happened. The founder is then in the position of accepting a deeply discounted buyout, or holding the original earnout claim against an indifferent counterparty for two more years.
The two sides combine into the asymmetry the title of this post is pointing at. The founder’s recovery is capped by the original earnout target on the upside. It is uncapped on the downside, in the sense that operational decisions by an unrelated third party can effectively zero out the recovery. And there is no contractual mechanism that converts the asymmetry into a fair settlement.
What the recent doctrinal line is signaling
The 2025 Chancery line on earnout disputes — particularly in cases involving post-closing reorganizations by the buyer — has been notable for two things. First, the court has continued to enforce the parties’ express bargain, refusing to read acceleration into agreements that did not provide for it, even where the post-closing business has been functionally dismantled. Second, the court has been increasingly willing to scrutinize the buyer’s operational decisions under the implied covenant, but only where the seller can show that those decisions were taken with the specific purpose of avoiding the earnout — a standard that requires document discovery, internal communications, and time.
The signal for drafters is that the implied-covenant safety net is real but expensive. It exists for the cases where the post-closing conduct is provably malicious. It does not protect founders in the much more common case where the post-closing conduct is merely indifferent to the earnout because the operator has different priorities. The Chancery’s published opinions in this area repay reading for any founder considering an earnout-heavy deal structure.
The doctrinal direction also suggests that contract is doing most of the work and will continue to do most of the work. If the founder wants protection against the buyer-change-of-control case, the founder must negotiate it expressly. The default is not going to be rewritten by litigation in the founder’s favor.
The drafting fix — three options, in increasing seller-friendliness
The first option, and the one most achievable in market negotiations, is a soft acceleration trigger. The clause provides that on a change of control of the buyer, the remaining earnout is accelerated at a defined percentage — say, 75 percent of the remaining target value — and paid out at closing of the buyer’s sale transaction. The discount reflects the buyer’s argument that the founder is being paid for unearned future performance. The acceleration reflects the founder’s argument that the value of the remaining earnout is materially impaired by the new owner’s operational autonomy. The number is a negotiation, but the principle of partial acceleration is much more market-defensible than full acceleration.
The second option, more aggressive but still negotiable in some deals, is a put right. On a change of control of the buyer, the founder may elect either to continue the earnout under the original terms (taking the risk that the new owner manages the business well) or to put the remaining earnout to the buyer at an agreed valuation — typically the target value discounted to present value at an agreed rate. The put right shifts the option to the seller, which is the right party to hold the option, because the seller is the party with the least information about the new owner’s plans.
The third option is a structural alternative: convert the earnout to a fixed deferred payment schedule on change of control. The remaining earnout payments become unconditional debt obligations of the buyer (or its successor), payable on the original earnout payment dates, regardless of performance. This converts the seller’s exposure from operational risk to credit risk against a now-larger and presumably more creditworthy successor. It is the cleanest fix and the hardest one to get past a sophisticated buyer’s deal team, but in deals where the seller has real leverage — strong competing bids, a category-leading asset — it is the right ask.
A note on the integration-period covenant
Independent of the acceleration question, every earnout agreement should include an integration-period covenant that survives a buyer change of control. The covenant should require the post-closing business to be operated as a separate reporting unit, with separately maintained books and records, for the duration of the earnout. It should restrict the buyer (and any successor) from taking specified actions — reassigning customers, rebranding the product, consolidating the salesforce — without the seller representative’s consent. It should grant the seller representative information rights and audit rights against the post-closing financials.
The covenant does not solve the acceleration question, but it raises the cost of post-closing conduct that would otherwise tank the earnout. The seller-friendly versus buyer-friendly framing of these earnout protections is one of the most important drafting conversations in any deal that uses an earnout as a material component of the consideration. A founder who walks into the conversation prepared to negotiate the integration-period covenant — and to negotiate it before signing the LOI, when the leverage is still in the seller’s hands — captures most of the protection that doctrine and litigation cannot reliably provide.
Why this hurts founders twice
I called the default a double-sided exposure because the founder loses twice. First, the founder loses the operational continuity the earnout depended on, because the new owner has no contractual obligation to preserve the standalone business and frequently has affirmative reasons not to. Second, the founder loses negotiating leverage at the moment the renegotiation conversation begins, because the new owner is the party that controls whether the milestones can hit and the new owner knows it.
The right way for a founder to think about an earnout in 2026 is as a contingent claim against the buyer’s operational discretion — a discretion that may transfer to an unrelated third party at any point during the measurement period, and that the founder has no enforceable mechanism to direct. The contract terms that address what happens on a buyer change of control are not boilerplate. They are the most important seller-protection provisions in the entire agreement. The structural mechanics of M&A consideration are where the leverage lives, and the leverage is heaviest before the LOI is signed.
If you are a founder negotiating an earnout-heavy deal structure, or thinking through how your existing earnout is exposed to a buyer change of control, feel free to reach out to my firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
