Earnout
Categories: Entrepreneur, Investing
In French, pronounced, "Air New."
But it's not...French. It's very Silicon Valley.
You invent a dynamite new app that you know will take the world by storm (and make a lot of money in the process). However, you don't really know how to market it and, frankly, your bills are starting to add up. So you decide to sell to one of the half dozen suitors who want to buy it for a million bucks.
You make a deal to sell the app to a Zynga, world's biggest maker of apps. But you and the Corporate Development person don't see eye to eye on price. You want 8; they want 5. You think your growth will be the shape of an F-16 taking off; they think it will be more like a Boeing 767. So you negotiate an earnout.
This provision allows you to get additional payments down the road based on the performance of the app. So you'll get some money now, an additional payment when the app reaches 10,000 downloads, another one at 25,000 downloads, etc. If it's more like the F-16, you get closer to 8; if more like the 767, you get closer to 5...and the deal then is "hedged," so that the buyer doesn't feel ripped off and the seller doesn't feel like a shmuck.
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Finance: What is MBO v LBO?17 Views
Finance allah shmoop What is an m b o versus
and lbo Okay let's Get their letters right first And
n b o is a management buyout Ngos on their
own aren't all that common But in a given company
inside management might own same thirty percent of the stock
They might partner with another investor who owns a twenty
percent or more And then they might borrow say fifty
percent in debt and take the company private fixit pivot
tweak live with bad quarters for a while without wall
street yelling at him And then they might sell the
company cell or whatever Maybe take it public again will
The distinctive feature here is that the company is already
in place Management is doing the deal and more often
than not essentially all the net worth of the management
will be in the company leveraged when the embryo is
completed And that level of financial commitment really keeps the
team focused Because if things don't work out when they
lose everything your house their car in there Slinky collection
All right next up we have an lbo which is
a leveraged buyout and it just refers to the practice
Of taking on debt to buy a company sometimes with
same management sometimes with different players like an lbo is
a bigger venn diagram set than the embryo thing Well
in an lbo the same basic thing happens But in
a whole bunch of cases management is tossed out The
company wouldn't be quote vulnerable unquote to an lbo Had
management done a good job and kept the company trading
or valued at a high multiple where it would then
be almost impossible to make the risk reward scenario workout
in taking out a whole lot of debt to get
company bought and then turned in the right direction Instead
new management in lbo is usually brought in and resembling
moses noah and other biblical characters and their perceived greatness
and there's a stone tablet with a new set of
commandments Thou shalt be profitable or something like that Arguments
are had at the board level and eventually either the
lbo works and the company has taken public again or
sold for a big price Or it isn't and wrath 00:02:06.63 --> [endTime] has had