The Earn-Out Was the Relationship

Skadden published a June guide this year on buying founder-led brands, and the center of the piece is a structure founders already know by another name. Earn-outs can carry twenty to thirty percent of the purchase price, sometimes more, and the firm is clear about what happens next. Once operational control moves to the buyer, the founder and the buyer start arguing about whether management decisions undermined the metrics the payout depends on. The earn-out was designed to keep both sides invested after the signature. What it actually does is relocate the hard conversation from the term sheet to the first quarter where the numbers miss, with lawyers already in the room and no shared language for why the miss occurred.

Founders building strategic partnerships are running a lighter version of the same structure every week. They attach future upside to future performance, call it alignment, and treat the signature as the moment the relationship becomes real. The revenue share, the co-sell target, the staged equity, the milestone bonus all function as earn-outs dressed in commercial language. The parties congratulate themselves on having built skin in the game. What they have built is a deferred argument about who controls the conditions under which the skin is earned, and that argument is waiting for the first period where the number fails to clear.

The Metric That Assumes Control

Every earn-out, formal or informal, rests on a quiet assumption that both sides will keep operating the business the way it was operating when the metric was written. Skadden notes that careful drafting around performance metrics and operating covenants is essential, and that even then the structure remains ripe for litigation once day-to-day control shifts. Partnership agreements make the same assumption without the drafting. A founder promises a partner a share of pipeline that the partner will generate through a co-selling motion neither party has run together. A creator locks a brand into a performance bonus tied to conversion rates the brand will influence through product, pricing, and fulfillment the creator does not control. A consultant structures a success fee against a client outcome that depends on the client implementing the work on a timeline the consultant cannot enforce.

The metric looks clean on the page because the page freezes a moment in which both sides still believe the other will behave. The moment the partnership is live, behavior becomes the variable the metric never priced. One side slows a launch to protect quality. The other side accelerates a campaign to hit a quarterly target. Both decisions are defensible inside each company's operating logic. Both decisions move the number the earn-out depends on. Neither decision was written into the agreement as a contingency, because writing it down would have required admitting that control over the outcome was never jointly held.

Founders who have lived through this pattern often describe the failure as a communication problem or a trust problem. The more precise description is a control problem that was papered over with upside. The upside felt generous. The generosity substituted for a conversation about who decides when the conditions of performance change, and that substitution is the reason the first missed period feels like betrayal rather than information.

What the Structure Teaches Both Sides

An earn-out teaches the party waiting on the payout to manage the relationship around the metric, and it teaches the party holding operational control to manage the metric around the relationship. Over a few quarters, both sides become sophisticated at protecting their position without ever naming the protection as the work. Check-ins get shorter. Updates get more polished. Disagreements about process get deferred until after the next measurement window. The partnership starts to look stable from the outside because the surface has been optimized for the earn-out, and the surface is the only thing either side is still measuring carefully.

The cost shows up in the quality of decisions that never get made. A product change that would improve long-term fit gets delayed because it would disrupt a short-term conversion number. A market the partnership should exit stays on the roadmap because exiting would collapse a milestone. A hard conversation about capacity gets scheduled for after the next good quarter, which is exactly the quarter both sides have been trained to protect. The structure that was supposed to keep both parties invested has trained both parties to treat the relationship as a scoreboard, and scoreboards do not produce judgment. They produce optimization.

Founders who scale partnership volume without fixing this pattern compound the problem across multiple relationships at once. Each deal carries its own deferred argument. Each deferred argument consumes attention that should have gone to the work. Platforms that surface partner fit and behavioral signal before the commercial terms are locked, the kind of infrastructure onSpark builds for operators who grow through partnerships, exist because the earn-out logic keeps failing in the same place. The signature is the easy part. The part that decides whether the relationship survives is the first time the metric and the reality diverge, and most agreements have nothing useful to say about that moment.

Write the Control Before You Write the Upside

Skadden's alternative structure is instructive even for founders who will never sell a brand. Pair a smaller commitment with a commercial relationship that can be tested before either side locks large contingent economics. In partnership terms, that means running a defined pilot with explicit operating rules before the revenue share, the equity, or the multi-year exclusive ever hits the page. The pilot is not a courtesy period. It is the only window in which both sides can observe how the other behaves when a number moves against them, and that observation is worth more than any earn-out clause either counsel will draft.

The founders who avoid the earn-out trap still use upside. They simply refuse to let upside stand in for a shared definition of control. They write who decides when a launch slips. They write what happens when a channel underperforms for reasons outside either party's direct authority. They write how a metric gets revised when the operating environment changes, and they write it while both sides still like each other enough to be honest. The document that results looks less optimistic than the ones that fail. It also survives the first bad quarter, which is the only test that matters.

The Skadden piece is written for buyers of founder-led brands. The pattern it describes is older than that market and wider than M&A. Every partnership that attaches future money to future performance without settling who steers the conditions of performance has already chosen its failure mode. The earn-out was never the relationship. It was a bet that the relationship would not need to be managed once the money was on the table, and the table always collects.