An earnout clause is a contractual provision typically used in business acquisitions, where part of the purchase price is contingent on the future performance of the acquired business. This clause aims to bridge valuation gaps by aligning the seller's compensation with the business's success post-acquisition, often based on specific financial targets or milestones.
EARNOUT ESCROW AGREEMENT This EARNOUT ESCROW AGREEMENT (this “Agreement”) is made and entered into as of December 16, 2020, by and among Skillz Inc., a Delaware corporation (f/k/a Flying Eagle Acquisition Corp.) (“PubCo”), Andrew Paradise, in his capacity as the Stockholder Representative (acting on behalf of Stockholder Earnout Group and not in his personal capacity) (together with any successor appointed in accordance with the Merger Agreement, the “Stockholder Representative”), Eagle Equity Partners II, LLC (the “Sponsor”, and together with PubCo and the Stockholder Representative, sometimes referred to individually as a “Party” or collectively as the “Parties”), and Continental Stock Transfer & Trust Company (the “Earnout Escrow Agent”). Capitalized terms used but not defined herein shall have the respective meanings ascribed to them in the Merger Agreement (as defined herein).
WHEREAS, in accordance with Section 3.07 of the Merger Agreement, Ten Million (10,000,000) shares of Acquiror Class B Common Stock held on record by the Sponsor will constitute the Earnout Shares (the “Earnout Shares);
WHEREAS, the Earnout Shares shall be held in escrow by the Earnout Escrow Agent pursuant to the terms of this Agreement (the “Escrow Account”) and shall be released by the Earnout Escrow Agent only upon the occurrence of certain triggering events as specifically set forth in this Agreement and pursuant to Section 3.07 of the Merger Agreement;
At the Closing and immediately prior to the Effective Time, the Sponsor will deliver, or cause to be delivered, 10,000,000 shares of Acquiror Class B Common Stock (5,000,000 of such shares constituting the “Sponsor Earnout Shares” and 5,000,000 of such shares constituting the “Stockholder Earnout Shares”) to the Earnout Escrow Agent electronically through the DTC’s Deposit/Withdrawal At Custodian system to an account designated by the Earnout Escrow Agent.
The Earnout Escrow Agent will hold the Stockholder Earnout Shares in the Escrow Account as a book-entry position with a number of Stockholder Eanout Shares registered in the name of each member of the Stockholder Earnout Group as set forth opposite such Member’s name on Exhibit A, until any such Stockholder Earnout Shares are to be (i) released to each member of the Stockholder Earnout Group on a Pro Rata Basis, or (ii) otherwise forfeited and released to PubCo, in each case, in accordance with the terms of this Agreement and the Merger Agreement.
Earnout Escrow Agent. (a) The Earnout Escrow Agent shall have only those duties as are specifically and expressly provided herein, which shall be deemed purely ministerial in nature, and no other duties shall be implied. The Earnout Escrow Agent shall not have any fiduciary, partnership or joint venture relationship with any Party or any other person or entity arising out of or in connection with this Agreement.
The Earnout Escrow Agent shall not be responsible for, nor chargeable with, knowledge of, nor have any requirements to comply with, the terms and conditions of any other agreement, instrument or document among the Parties, in connection herewith, if any, including without limitation the Merger Agreement, nor shall the Earnout Escrow Agent be required to determine if any person or entity has complied with any such agreements, nor shall any additional obligations of the Earnout Escrow Agent be inferred from the terms of such agreements, even though reference thereto may be made in this Agreement. In the event of any conflict between the terms and provisions of this Agreement, those of the Merger Agreement, any schedule or exhibit attached to this Agreement, or any other agreement among the Parties, the terms and conditions of this Agreement shall govern and control in all respects relating to the Earnout Escrow Agent, but in every other respect involving the parties and beneficiaries of any such other agreement, the other agreement shall control.
“1.2 Earnout. (a) Earnout Generally. At the Closing or as soon as reasonably practicable thereafter, and, in any case, by no later than seven (7) Business Days after the Closing and after receipt of all required approvals from any applicable Governmental Authority for the Israeli Prospectus (as defined in Section 5.15(a)), subject to the terms and conditions set forth herein, the Company shall issue to the Company Shareholders who were Company Shareholders as of immediately prior to the Closing at a record date to be determined by the Company in coordination with the TASE (the “Pre-Closing Company Shareholders”) an aggregate of Four Million (4,000,000) non-tradeable, non-assignable rights (the “Earnout Rights”), to be allocated among the Pre-Closing Company Shareholders according to their respective Pro Rata Shares. The Earnout Rights shall be automatically converted (subject to Section 1.2(i) below) into Company Ordinary Shares (by the Company issuing one Company Ordinary Share in lieu of each converted Earnout Right which shall be automatically cancelled and extinguished upon such conversion), in an amount not to exceed Four Million (4,000,000) Company Ordinary Shares in the aggregate (subject to adjustment after the Closing for share splits, combinations or exchange or readjustment of shares, reorganizations, recapitalizations, share sub-divisions (including share consolidations), split-up and the like, including to account for any equity securities into which such shares are exchanged or converted) (the “Earnout Shares”), upon and subject to the occurrence of Earnout Milestone(s) (as defined below) during a five-year period (which shall commence as of the first day of the full fiscal quarter immediately following the Closing) (the “Earnout Period”), subject to the other terms set forth below, in accordance with the terms set forth in Section 1.2(h) below, and without the payment of any consideration by the Pre-Closing Company Shareholders (other than, to the extent applicable, the transfer of the applicable Withholding Amount (as defined below) by each respective Pre-Closing Company Shareholder in accordance with the terms set forth in Section 1.2(h) below). The Earnout Rights shall be issued through the “Nesher system” of the TASE. The Earnout Rights shall convert automatically (subject to Section 1.2(i) below) into Earnout Shares in accordance with the terms set forth in Section 1.2 below. All conversions of Earnout Rights by Pre-Closing Company Shareholders shall be in accordance with the rules and regulations of the TASE and the “Nesher System” (to the extent that the Company is listed for trading on the TASE at such time) and otherwise in accordance with the rules of any stock exchange on which the Company’s shares are then traded (to the extent applicable).
(i) In the event that, at any time during the Earnout Period, (A) the gross revenue of the Company on a consolidated basis (including gross revenue of any type and nature (including but not limited to gross revenue derived, generated or attributable to (i) any acquisition(s) made by the Company or its Subsidiary(ies), (ii) any financing revenue (net of any placement agent, finders’ or similar fees and related transaction fees and expenses of such financing) and any other gross revenue, either recurring or derived, generated or attributable and recognized one-time) as recorded in the Company’s quarterly financial statements reviewed by the Company’s independent accountants and included in the quarterly report of the Company filed with the SEC for such period) (if relevant, the results of the fourth quarter shall be extracted from the financial statements filed by the Company with the SEC with respect to the full fiscal year) (the “Gross Revenue”) is in the aggregate greater than or equal to ten million dollars ($10,000,000.00) for any four fiscal quarters within a consecutive five fiscal quarter period (the “First Revenue Earnout Milestone”), or (B) the VWAP of the Company Ordinary Shares equals or exceeds $12.00 (as adjusted for share splits, share dividends, combinations or exchange or readjustment of shares, reorganizations and recapitalizations, share sub-division (including share consolidation), split-up and the like) (the “Tier I Share Price Target,” and with the First Revenue Earnout Milestone, each a “First Earnout Milestone”; the date, if any, on which the First Earnout Milestone has been achieved is referred to herein as the “First Earnout Milestone Achievement Date”) for any twenty (20) Trading Days within any thirty (30) consecutive Trading Day period during the Earnout Period, then, subject to the terms and conditions of this Agreement, twenty-five percent (25%) of the Earnout Rights shall automatically convert (subject to Section 1.2(i) below) into twenty-five percent (25%) of the Earnout Shares (“First Level Contingent Share Consideration”) as soon as practicable following the settlement of the applicable Earnout Milestone as detailed in Section 1.2(b) and/or 1.2(c) below, as applicable. The allocation of the First Level Contingent Share Consideration among the Pre-Closing Company Shareholders shall be made in accordance with each Pre-Closing Company Shareholder’s Pro Rata Share of the First Level Contingent Share Consideration;
(ii) In the event that (A) for any two consecutive fiscal quarters commencing with the first full fiscal quarter following the First Earnout Milestone Achievement Date, the Gross Revenue is in the aggregate greater than or equal to ten million dollars ($10,000,000.00) (the “Second Revenue Earnout Milestone”), or (B) the VWAP of the Company Ordinary Shares equals or exceeds $16.00 (as adjusted for share splits, share dividends, combinations or exchange or readjustment of shares, reorganizations and recapitalizations, share sub-division (including share consolidation), split-up and the like) (the “Tier II Share Price Target,” and with the Second Revenue Earnout Milestone, each a “Second Earnout Milestone”; the date, if any, on which the Second Earnout Milestone has been achieved is referred to herein as the “Second Earnout Milestone Achievement Date”) for any twenty (20) Trading Days within any thirty (30) consecutive Trading Day period during the Earnout Period, then, subject to the terms and conditions of this Agreement, thirty-five percent (35%) of the Earnout Rights shall automatically convert (subject to Section 1.2(i) below) into thirty-five percent (35%) of the Earnout Shares (“Second Level Contingent Share Consideration”) as soon as practicable following the settlement of the applicable Earnout Milestone as detailed in Section 1.2(b) and/or 1.2(c) below, as applicable. The allocation of the Second Level Contingent Share Consideration among the Pre-Closing Company Shareholders shall be made in accordance with each Pre-Closing Company Shareholder’s Pro Rata Share of the Second Level Contingent Share Consideration; and
(iii) In the event that (A) for any two consecutive fiscal quarters commencing with the first full fiscal quarter following the Second Earnout Milestone Achievement Date, the Gross Revenue is in the aggregate greater than or equal to fifteen million dollars ($15,000,000.00) (the “Third Revenue Earnout Milestone,” and with the First Revenue Earnout Milestone and Second Revenue Earnout Milestone, each a “Revenue Earnout Milestone”), or (B) the VWAP equals or exceeds $23.00 per Company Share (as adjusted for share splits, share dividends, combinations or exchange or readjustment of shares, reorganizations and recapitalizations, share sub-division (including share consolidation), split-up and the like) (the “Tier III Share Price Target,” (i) and with the Tier I Share Price Target and the Tier II Share Price Target, each a “Price Earnout Milestone” and (ii) and with the Third Revenue Earnout Milestone, each a “Third Earnout Milestone”) for any twenty (20) Trading Days within any thirty (30) consecutive Trading Day period during the Earnout Period, then, subject to the terms and conditions of this Agreement, forty percent (40%) of the Earnout Rights shall automatically convert (subject to Section 1.2(i) below) into forty percent (40%) of the Earnout Shares (“Third Level Contingent Share Consideration”) as soon as practicable following the settlement of the applicable Earnout Milestone as detailed in Section 1.2(b) and/or 1.2(c) below, as applicable. The allocation of the Third Level Contingent Share Consideration among the Pre-Closing Company Shareholders shall be made in accordance with each Pre-Closing Company Shareholder’s Pro Rata Share of the Third Level Contingent Share Consideration.
“Section 2.3. Earnout Shares. (a) Immediately following the Effective Time, Parent shall deliver electronically through DTC, using DTC’s Deposit/Withdrawal At Custodian System, to the Earnout Escrow Agent (as defined below), a number of Parent Shares equal to (x) 12,000,000 minus (y) the number of Parent Restricted Stock Units to be issued pursuant to Section 2.5(a) and Section 2.5(b) (such Parent Shares, the “Earnout Shares”). Upon receipt of the Earnout Shares, an escrow agent (the “Earnout Escrow Agent”) will place such Earnout Shares in an escrow account (the “Earnout Escrow Account”) established pursuant to an escrow agreement in the form attached hereto as Exhibit H, to be entered into at the Closing by Parent, the Stockholder Representative and the Earnout Escrow Agent (the “Earnout Escrow Agreement”). The Earnout Shares shall be allocated among the Company Stockholders in the manner set forth in the Allocation Schedule.
“Earnout A Milestone” shall mean the receipt of Company Product Net Sales of $222,000,000 or more during any consecutive twelve (12) calendar months (whether the first day of such period occurs prior to, on or after the Closing Date).
“Earnout Amount” shall mean the Earnout A Amount, the Earnout B Amount or the Prorated Earnout B Amount.
“Earnout B Milestone” shall mean the occurrence of both of the following: (i) the receipt of Company Product Net Sales of $230,000,000 or more during any consecutive twelve (12) calendar months that each occur in full during the Earnout B Earnout Period and (ii) a Gross Margin in respect of such twelve (12) calendar month period of equal to or greater than 57.0%.
“Earnout B Earnout Period” shall mean the eighteen (18) consecutive calendar months beginning with the first calendar month that begins on or after the Closing Date. By way of example, (i) if the Closing Date occurs on October 22, 2019, the Earnout B Earnout Period would begin on November 1, 2019 and end on April 30, 2021 and (ii) if the Closing Date occurs on December 1, 2019, the Earnout B Earnout Period would begin on December 1, 2019 and end on May 31, 2021.
“Earnout B End Date” shall mean the last day of the Earnout B Earnout Period.
“Earnout Period” shall mean the period beginning on the Closing Date and ending on the first date that (a) the Earnout A Milestone has been achieved and (b) either (i) the Earnout B Milestone has been achieved or (ii) the Earnout B End Date has occurred.
“Prorated Earnout B Milestone” shall mean the occurrence of both of the following: (i) the receipt of Company Product Net Sales of equal to or greater than $228,100,000 but less than $230,000,000 during any consecutive twelve (12) calendar months that each occur in full during the Earnout B Earnout Period and (ii) a Gross Margin in respect of such twelve (12) calendar month period of equal to or greater than 57.0%.
EARNOUT Section 2.1 Payment of Earnout Amounts. (a) If the Earnout A Milestone is achieved and the Earnout A Amount has become final and binding in accordance with Section 2.3, then the Purchaser shall pay an amount in cash equal to $25,000,000 minus any amounts offset against payment obligations of the Seller pursuant to, and subject to the terms and conditions of, Section 9.4(e) of the Purchase and Sale Agreement (the “Earnout A Amount”), by wire transfer of immediately available funds to one or more bank accounts designated in writing by the Seller on the later of (i) December 31, 2019 and (ii) the date that is five (5) Business Days following the date that the Earnout A Amount has become final and binding in accordance with Section 2.3.
Section 2.2 Earnout Statement; Access to Information. (a) Earnout Statements for Earnout A. (i) As promptly as practicable, but in any event not later than thirty (30) days after the Closing Date, the Seller will deliver to the Purchaser a written statement (an “Earnout Statement”) indicating whether the Earnout A Milestone was achieved in respect of any consecutive twelve (12) calendar months beginning on or after July 1, 2018 and ending prior to the Closing Date and, if the Earnout A Milestone was achieved in respect of any such period, the Seller’s good faith calculation of the amount of Company Product Net Sales for the applicable period, together with reasonable supporting documentation. (ii) Until the Earnout A Amount is paid pursuant to this Agreement, as promptly as practicable, but in any event not later than thirty (30)days after the end of each calendar month that ends on or after the Closing Date, the Purchaser will deliver to the Seller an Earnout Statement indicating whether the Earnout A Milestone was achieved in respect of the immediately preceding twelve (12) calendar months and setting forth the Purchaser’s good faith calculation of the amount of Company Product Net Sales for such period, together with reasonable supporting documentation. (b) Earnout Statements for Earnout B. As promptly as practicable following the end of each calendar month in the Earnout B Earnout Period, but in any event not later than thirty (30) days after the end of each such applicable month in the Earnout B Earnout Period, the Purchaser will deliver to the Seller an Earnout Statement (i) setting forth the Purchaser’s good faith calculation of the amount of Company Product Net Sales and the Gross Margin for such period (on a monthly and cumulative basis), together with reasonable supporting documentation and (ii) beginning with the twelfth (12th) calendar month in the Earnout B Earnout Period, indicating whether the Earnout B Milestone was achieved in respect of the immediately preceding twelve (12) calendar months. In addition, as promptly as practicable following the end of the last calendar month in the Earnout B Earnout Period, but in any event not later than thirty (30) days after the end of such month, if the Earnout B Milestone is not achieved, the Purchaser will deliver to the Seller an Earnout Statement indicating whether the Prorated Earnout B Milestone was achieved in respect of any consecutive twelve (12) calendar months during the Earnout B Earnout Period and setting forth the Purchaser’s good faith calculation of the amount of Company Product Net Sales and the Gross Margin throughout the Earnout B Earnout Period and the applicable Prorated Earnout B Amount. 7
An earnout is a contractual provision typically used in mergers and acquisitions (M&A) whereby the seller of a business can receive additional payment in the future, contingent upon the business achieving specific financial performance targets. These targets often include metrics such as revenue, profit, or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
Earnouts are particularly beneficial in situations where there is a discrepancy between the buyer and seller regarding the future performance of the business.
Writing an effective earnout involves several key elements:
Example: “The Seller shall receive an additional $500,000 contingent upon achieving a cumulative EBITDA of $5 million over the next two fiscal years.”
Earnouts are most commonly included in:
Including an earnout in these contracts allows flexibility and can underpin the transaction’s success by aligning the interests of the buyer and seller.
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