The Andrew Wilkinson & Tiny Guide to Earnouts vs Cash Upfront (Real-World Founder Math)

The Andrew Wilkinson & Tiny Guide to Earnouts vs Cash Upfront (Real-World Founder Math) exists because founders ask me the same question: should I take the money now or bet on an earnout later.
I’ll show you exactly how I weigh cash at close, earnouts, rollover equity, escrow, and seller notes.
I’ll use simple math, clear rules, and fast templates you can copy.
I’ll also show you how to package your deal so Tiny can move quickly with clean, founder-friendly terms.

What This Is (and Why It Matters)

I buy durable, profitable businesses and I want founders to leave happy.
Cash upfront reduces your risk.
Earnouts can increase your headline price but add complexity and delay.
This guide helps you choose the mix that maximizes net, certainty, and sanity.

Simple Definitions So We Don’t Talk Past Each Other

Cash at close.
Money wired on day one.
Lowest risk.

Earnout.
Extra consideration paid later if agreed metrics are hit.
Higher risk.

Rollover equity.
You keep a stake in the company post-close.
Aligned upside.

Seller note.
You finance a slice of the deal.
Paid back with interest.

Escrow / holdback.
Cash set aside to cover reps & warranties.
Released after a period if no claims.

The Three Levers That Decide Your Real Outcome

Certainty.
What’s guaranteed vs. what’s contingent.

Control.
Who controls the levers that drive the earnout.

Time.
How long until you actually receive the money.

When in doubt, I overweight certainty.
I’d rather pay a fair price now than argue about adjustments later.

Real-World Founder Math: Five Deal Shapes Compared

Assume a company with $5M EBITDA and a 6x headline = $30M price.
Assume round numbers for illustration.
Taxes vary by jurisdiction and structure, so talk to your advisor.

A) All Cash at Close

Price: $30M.
Cash Day 1: $30M.
Risk: Low.
Complexity: Low.
Net after typical close costs: Highest certainty.

B) 80% Cash + 20% Earnout (12–18 months, EBITDA target)

Cash Day 1: $24M.
Earnout: $6M if EBITDA ≥ target.
Risk: Medium.
Complexity: Medium (definitions matter).
Note: One missed definition in EBITDA can erase value.

C) 60% Cash + 40% Earnout (revenue target, 24 months)

Cash Day 1: $18M.
Earnout: Up to $12M.
Risk: Higher.
Complexity: Higher (revenue can be “redefined”).
Note: Any pricing changes, SKU pruning, or mix shift can distort the math.

D) 70% Cash + 20% Rollover + 10% Seller Note

Cash Day 1: $21M.
Rollover: $6M in NewCo equity.
Seller Note: $3M at, say, 8% interest.
Risk: Split between credit risk and market upside.
Note: Great when you believe in compounding and trust governance.

E) 90% Cash + 10% Escrow (12 months)

Cash Day 1: $27M.
Escrow: $3M released if no claims.
Risk: Low to medium.
Complexity: Low.
Note: Cleanest structure after all-cash.

Founder takeaway: A smaller headline with more cash often beats a larger headline with heavy earnouts.

When an Earnout Actually Makes Sense

Earnouts are useful when there’s a clear, near-term catalyst both sides believe in.
Think migrating a backlog of signed customers, shipping a delayed v2, or turning on distribution you already secured.

My rules of thumb:

Keep it short (≤18 months).
Keep it small (≤20–25% of price).
Keep it simple (one metric, one schedule).
Put governance in writing (who decides pricing, hiring, spend).

When to Walk From an Earnout

Walk if the metric is murky, if the buyer controls all the levers, or if the reporting can be gamed.
Walk if legal definitions run longer than your SPA.
If you wouldn’t lend your own money on those terms, don’t lend your outcome to them either.

Rollover Equity vs. Earnout: Very Different Bets

Rollover is a bet on the future company with you and the buyer aligned.
Earnout is a bet on hitting a target under terms that may shift.

If you believe in Tiny’s stewardship and the moat, I prefer rollover over a large earnout.
Only roll what you’d happily invest today.

Tax Basics That Change the Scoreboard

Cash at close is usually treated as capital gains in many jurisdictions.
Earnouts can be taxed when received, sometimes as capital gains, sometimes partly as ordinary income depending on structure.
Rollover can defer tax if structured properly.
This is not advice.
Get a tax plan before you sign the LOI.

The Working Capital Peg: The Quiet Price Change

Your price adjusts by the net working capital delivered at close.
If you don’t model the peg, you’ll give back dollars you thought you were getting.

Tip: Build a trailing 12-month average, seasonally adjust, and agree on a clear definition.
Small here isn’t small.
It’s real money.

Indemnities, Caps, and Escrow: Protect the Downside

Keep survival periods reasonable and caps tight.
Match escrow size and term to the actual risk.
Use baskets and deductibles to avoid nickel-and-diming.
This shrinks surprises and makes cash-heavy deals easier to approve.

Choosing the Earnout Metric You Can Actually Collect

If you must do an earnout, pick one metric.
Revenue is tempting but slippery.
Gross profit is better.
EBITDA is best only if you can lock definitions for add-backs, allocations, and shared services.

Governance must specify:

Pricing authority.
Hiring and opex approvals.
Integration and cost allocations.
Reporting cadence and audit rights.

Integration Risk: Tiny vs. Strategic Buyers

Strategics change roadmaps, pricing, and teams.
Earnouts die there.
Tiny prefers durable cash machines and light-touch integration.
That’s friendlier to clear metrics and payouts.

Pricing Concentration and Platform Risk

Heavy customer concentration, key-person dependencies, or single-platform acquisition will push buyers toward earnouts.
Clean those risks pre-LOI and you’ll convert earnout dollars to cash dollars.

The Simplicity Premium: Why Clean Deals Pay More, Faster

Buyers pay for velocity and certainty.
If your data room is reconciled, your retention and cohorts are clear, and your legal/IP is tidy, I can lean into cash.
Simple beats clever.
Every time.

The Negotiation Sequence That Maximizes Net

Align on structure before arguing headline price.
Trade earnout dollars for cash and complexity for certainty.
Use escrow, caps, and a tight peg to protect both sides.
Get tax and estate planning done before you sign.

For crisp comms that speed decisions, see our blog post: I Don’t Respond to Long Emails.

Data Room Prep That Unlocks Cash at Close

Upload the vital 20% first.

TTM P&L tied to bank statements.
Top-20 customers by month with churn and cohorts.
AR/AP aging and deferred revenue schedule.
Contracts, IP assignments, and org chart with roles.

For cutting noise so diligence flies, read: Delete 95% of Your Email.

Common Earnout Traps I Red-Ink Immediately

Vague EBITDA definitions.
Integration “synergies” that reduce your metric.
No say in pricing or hiring.
No audit rights.
Payment nets against unrelated claims.
Shifting seasonality baselines.
If it isn’t explicit, assume it won’t pay.

Founder Psychology: What You’re Really Optimizing For

Be honest about the job you want after close.
If you crave clean separation, prioritize cash and simplicity.
If you love the game and trust the steward, consider rollover.
Design the deal around your life, not Twitter.

For a window into how I think about focus and compounding, read: A $3,600 Keyboard and a $66 Million Dollar Investment.

A 30-Day Action Plan to Get an Offer Fast (With Minimal Earnout)

Days 1–3.
Tight one-pager, 8-slide deck, and pre-built vital data room.

Days 4–10.
First call, align on structure, trade earnout for cash, lock peg and escrow.

Days 11–20.
Diligence sprints with single-thread comms and weekly summaries.

Days 21–30.
Paper the deal, confirm funds flow, finalize transition plan.

For narrative that lands without fluff, see: Never Tell, Always Storytell.

Founder Cheat-Sheet: Quick Math You Can Run in Your Head

Every $1M shifted from earnout to cash increases certainty by 100% on that dollar.
A 12-month escrow at 10% is usually cheaper than a 24-month earnout at 20%.
One clean metric beats three partial metrics every day of the week.
Complexity compounds against you.
Speed compounds for you.

FAQs

How big should an earnout be, if I must have one.
Keep it ≤20–25% of the price and ≤18 months.

Which metric is safest for an earnout.
Gross profit with locked definitions, or EBITDA with ironclad add-backs and allocations.

Can I swap a bigger escrow for less earnout.
Yes, and you often should.
Escrow is simpler and ends on a date.

Is rollover equity better than an earnout.
If you trust the operator and the moat, yes.
It aligns incentives without moving goalposts.

What kills earnouts in practice.
Integration changes to pricing, costs, or reporting.
Ambiguous definitions.
No audit rights.

Do I need audited financials to get cash at close.
No, but I need reconciled statements tied to bank and clean supporting schedules.

How do taxes change the best structure.
Materially.
Plan early to optimize capital gains, deferral on rollover, and timing of earnout receipts.

Can I cap the earnout downside.
Yes.
Use floors, collars, and make sure unrelated indemnity claims don’t net against your earnout.

What’s a sensible escrow size and term.
Commonly 5–15% for 12–18 months, calibrated to real risk and reps.

How do I communicate this to my team and customers.
With one clear page emphasizing continuity and benefits, not drama.
Keep it human and brief.

Conclusion

The smartest deals balance cash now with aligned, simple upside later.
If you want high certainty and low drama, trade complexity for cash, keep any earnout short and small, and prefer rollover when you truly believe in the future.
That’s the heart of The Andrew Wilkinson & Tiny Guide to Earnouts vs Cash Upfront (Real-World Founder Math).
Get Your Copy of Never Enough at https://www.neverenough.com/

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