In my recent posts on the subject of earn-outs, I focus on how to avoid being burned by these structures. Another important part of the story is that VCs try to avoid these structures altogether. Here’s why:

• No Control Over Performance: While VCs don’t operate the startups that they invest in (entrepreneurs and hired managers do), they have the option to be actively involved as an advisor through board representation. When a portfolio company is acquired, VCs have even less of an ability to influence the direction of the company. Essentially, VCs are displaced by the management of the acquirer.
  
  As a result, VCs are adverse to earn-outs since they don’t want to have their returns impacted by factors outside of their control.


• Averse To Being Subject To Whims Of Large Corporations: The decision making at large corporations is often highly complex, reflecting a web of considerations that range from personal political agendas to shareholder biases. On any given day a new promotion or a shift in the stock market can start to shift the momentum of the organization in a new direction – a direction that may have an adverse impact on an earn-out. As I mentioned in prior posts, the whims of corporations can change resource allocation relatively quickly, devastating a newly acquired company’s plans for growth.
  
  This complex decision making process is concerning to VCs as a change in tide can destroy the likely pay-out for investors.