Thursday, July 1, 2010

Why Developers Should Never Agree to an Earnout...

A few years ago, Disney bought Club Penguin for $700 million....oops, I guess it was $350 million.

Basically, 50% of the deal was earnout based on profit milestones that Club Penguin missed.  

The biggest problem with earnout is that once you've been acquired you have much more limited control over the future of your product so that hitting your earnout target is dependent on the acquiring company's support.  If the acquirer changes product strategy after the acquisition and re-prioritizes resources away from your product, then you're screwed.  Sure, you can negotiate assurances and control over budget, hiring + firing etc.  But that's a bitch of a negotiation and you're not going to think of everything.

I often tell people to negotiate an upfront that are happy with and think of the earnout like a getting a supermodel's phone number, awesome if actually works, but don't count it.