More than 1 in 5 startup acquisitions include an earnout provision - PitchBook
In 2025, over 20% of VC-backed startup acquisitions included earnout provisions—conditional payments based on future performance—highlighting ongoing valuation gaps and buyer leverage in the market, with notable deals like e.l.f. Beauty’s $1 billion acquisition of Rhode and Xero’s $2.5 billion purchase of Melio featuring significant earnout components tied to growth targets.
More than 1 in 5 acquisitions of VC-backed startups last year included earnout provisions, according to new data from SRS Acquiom.
The prevalence of earnouts—which condition part of the deal’s total value on the acquired company reaching agreed-upon performance levels—reinforces that buyers still have much of the power in the current market, said Kip Wallen, a senior director at SRS Acquiom. While overall conditions for VC have improved since the downturn induced by spiking interest rates, earnouts remain a more common fixture.
“Both buyers and sellers in this market seem willing to agree to earnouts,” Wallen said. “The valuation gap issue continues to persist, a disconnect between what the target thinks their asset is worth and what buyers are willing to pay.”
Excluding life sciences, 22% of venture-backed startup sales last year came with an earnout, down from 26% in 2024 and 31% in 2023 when the VC market’s struggles were most pronounced—but up from 21% in 2022.
High-profile deals with earnouts include e.l.f. Beauty acquiring Rhode, Hailey Bieber’s VC-backed skincare startup, for $1 billion in May 2025. The $1 billion price tag included $800 million up front in a mix of cash and stock, coupled with a potential earnout of up to $200 million based on a post-deal three-year growth target.
In VC-backed tech acquisitions specifically, 19% carried an earnout last year, down from 23% in 2024 and 25% in 2023, but up from 16% in 2022. For AI startups, unproven potential adds to acquirers’ preference for earnouts.
New Zealand company Xero agreed to acquire New York-based accounting startup Melio for $2.5 billion in June 2025. The deal included an earnout provision of an additional $500 million if the startup hit certain performance targets. Similarly, Interactions, an AI startup backed by Revolution Growth and Comcast Ventures, sold to SoundHound AI in September 2025 for $60 million up front, with up to $25 million more tied to revenue targets through 2027.
A major reason for earnouts becoming the new normal is the reality that many startups are still stuck with inflated valuations from the 2020 and 2021 market peak, according to Evan Kipperman, a partner at law firm Wiggin and Dana who works on M&A deals. Many haven’t raised a round since, or have raised smaller amounts, making earnouts more palatable than a lower valuation.
These market dynamics, along with interest rates that remain high, have given cash-strapped acquirers leverage to push founders to sign off on earnout terms, Kipperman said.
“A lot of startup companies … haven’t made that leap with that next round of capital,” he said. “They have just gotten to the point where they need to get out, and it’s easier to team up with somebody else, and that somebody else is more likely to buy them with an earnout or a rollover than they are with cash—because they don’t have enough cash themselves.”