Legal Kitty™ Guide · Rhode × e.l.f.
How the money actually gets paid
The deal in one line
Part 1
Contingent consideration: part of the price that is paid only if set conditions are met.
… the right to receive the additional cash consideration (the “Additional Cash Consideration”), if any, that may become payable by Buyer (if at all) …
Practical point“If at all” means it is not guaranteed money.
Revenue, measured against rhode’s own projections.
… up to $100 million based on the achievement by the rhode business of annual revenue projections prepared by rhode …
Practical pointRevenue is the most seller-friendly metric. With EBITDA or profit, the buyer’s costs can eat your payout.
$100M for hitting the projections. Another $100M for beating them by a set margin.
… up to an additional $100 million upon overachievement by the rhode business of such revenue projections by a specified amount …
Practical pointThe second $100M is a stretch goal. Value it near zero when you negotiate.
Three annual targets, measured through 2028.
… contingent consideration payable upon achievement of certain performance milestones by 2028, with a maximum payment of $200 million …
Practical pointWith annual targets, one bad year can cost you a tranche. Push for cumulative measurement or catch-up rights.
e.l.f.’s own accounting note says it plainly.
If these performance milestones are not met, no payment will be made.
Practical pointTreat every earnout dollar as at risk until it is paid.
e.l.f. booked the up-to-$200M earnout at $7.1M fair value at closing. That is an accounting estimate, not a payout forecast.
… the $7.1 million fair value of the three annual earnout targets. …
Practical pointPrice the deal on what is paid at closing, not the headline.
The headline is the total for all sellers. Each seller’s share of the cash, the stock and the earnout is set on a Payment Schedule.
… the percentage set forth opposite the name of such Seller on the Payment Schedule …
Practical pointCheck your own row. The headline is not what you get.
Part 2
Rhode’s detailed earnout terms are not public. Clauses 1–5 are real excerpts from other public deals filed on SEC EDGAR. Clause 6 is from the e.l.f. × rhode merger agreement.
What it doesThe buyer runs the business after closing, and its choices drive your number.
… Buyer shall have no obligation to operate the Business in order to achieve or maximize the amount of any Earnout Payment …
Your askThe business is run consistent with past practice. Budget, team and distribution are kept. No bad-faith acts to avoid the earnout.
What it doesSets how revenue is counted, and what can be deducted.
… royalty revenue to the Buyer pursuant to the Transferred Assets, as recognized under generally accepted accounting principles (GAAP), less only commissions …
Your askFixed GAAP policies, consistent with the pre-closing books. No buyer reclassifications.
What it doesLets the buyer deduct indemnity claims from your earnout.
… finally resolved in favor of indemnification pursuant to Article IX hereof, then if the Indemnified Party is the Buyer, the Buyer may set-off against payments due to Seller …
Your askNo set-off. Failing that, set-off only for claims that are finally decided.
What it doesIf the buyer sells the brand or breaches, the earnout pays out in full.
… an aggregate amount in cash equal to the maximum Earnout Payment that could become payable for the Earnout Period in which the Acceleration Event occurred …
Your askFull acceleration on a change of control, a sale of the brand, or a covenant breach.
What it doesThe buyer calculates the number. Miss the objection window and it sticks.
… then the Earn-Out Statement as delivered by Buyer (and all items and amounts therein) shall be final and binding on the Parties.
Your askA statement within 60–90 days, access to the books, and an independent accountant whose decision is binding.
What it doesSets whether payments are taxed as sale price or as pay. Here, the actual e.l.f. × rhode text.
… (iii) any payments of the Additional Cash Consideration to the Sellers are intended to be treated as additional consideration paid for the Company Units …
Your askCapital-gains treatment, not compensation. Keep payments off any condition that you stay employed.
Don't sign it till you read it.
Part 1 sources: SEC EDGAR filings by e.l.f. Beauty, Inc. Part 2 sources are named under each clause.
Educational information only, not legal advice. Reading this guide does not create an attorney-client relationship.
