The buyer is making our earnout contingent on retaining three of our key software developers, but we do not have long-term employment agreements with them. How do we use a Phantom Stock Plan or stay bonuses to align their incentives with our exit milestones?

Question

Tyler Smith · Accepted Answer

Tying your earnout to the retention of specific software developers is highly risky, as you cannot legally force employees to stay, and their departure could cost you millions.

To mitigate this risk, you must align their personal financial incentives with your exit milestones using a structured retention plan.

Start by designing a Phantom Stock Plan or a deal-bonus pool that rewards these key team players for staying through the transition period. Allocate a percentage of the transaction proceeds or a portion of the earnout payments to a dedicated pool that vests over the exact duration of the earnout.

When selecting which employees to include, focus on individuals who embody the ideal team player virtues of being humble, hungry, and smart. These individuals are the most likely to honor their commitments and work collaboratively with the new owners.

Introduce this retention plan early, ensuring the metrics are clear, objective, and tracked during your regular team meetings.

Additionally, negotiate with the buyer to ensure the earnout agreement does not contain a hard forfeiture clause if an employee leaves due to death, disability, or termination without cause. Instead, the agreement should allow you to replace the departed employee within a reasonable timeframe without penalizing your earnout calculation.

By combining robust financial incentives with strong legal protections, you secure both your key talent and your payout.