In my series of post on avoiding being burned by an earn-out, I discuss how the entrepreneur can protect himself in the event of an earn-out. Similar tactics are relevant for VCs: base the payout on simple and controllable metrics, ensure the company has sufficient resources and keep the earn-out based on short time-frames.

The single best way to avoid being burned by an earn-out is to ensure that the upfront portion of the deal (which is not subject to future performance) is, in itself, a sufficient exit for all parties. The earn-out should be upside in the deal, not the majority of the deal itself.

In reality, securing such a structure is often easier said than done, depending on the negotiating position of the seller. Even so, achieving this goal should be an important objective in the negotiation – ensure that the immediate transaction is sufficient so that if the earn-out doesn’t meet expectations the VCs and entrepreneurs still end up doing well.