Earnout Structure Explained: What eBay Learned From Skype

An earnout is the part of a sale price that is not paid at closing but later, and only if the sold business hits agreed targets. It is deferred purchase price, not a bonus. Its real value has little to do with the headline maximum and almost everything to do with which number is measured and who controls the decisions that move that number after the sale.

eBay's 2005 purchase of Skype² is the clearest illustration. eBay paid roughly $2.6 billion at closing, in cash and stock,¹ with up to about $1.7 billion³ more to follow if Skype hit targets for active users, revenue and gross profit — sales minus the direct cost of delivering them. Skype's shareholders could elect a single fixed payment at close instead: certainty in place of the larger possible number. Those who took the earnout found their figure resting on decisions that now belonged to eBay — how to price calls, how hard to push Skype inside the marketplace, how much to spend on growth. In 2007 eBay recorded a charge of roughly $1.4 billion on the deal:⁴ about $900 million of it a write-down of Skype's value on the books, the rest a payment of roughly $530 million to end the earnout early rather than let the formula run its course. The product was not the problem — Microsoft would buy Skype years later for far more than eBay had paid.⁵ The deferred number was settled by a parent company's strategy.

The table below is for owners whose purchase agreement is being drafted, looking at a headline price with part of it deferred. Earnouts, holdbacks, seller notes and rollover equity sit in the same documents and sound adjacent. They are not the same instrument, and the difference between them is who decides the unpaid part.

Cash, earnout, holdback or note: who decides the unpaid part

Where the deferred piece is paid in the buyer's shares rather than cash, the question stops being targets and becomes concentration — a different problem, covered elsewhere on this shelf.

When this table is wrong

The table assumes the buyer intends to run the business roughly as it was sold. Strategic buyers often do not. A company acquiring to plug a product into a larger platform, to remove a competitor, or to hire a team may have no reason to grow the standalone numbers written into the formula. eBay did not buy Skype to maximise Skype's revenue; it bought Skype to make its own buyers and sellers talk to each other. An earnout on Skype's standalone figures measured something the parent had little incentive to move. Where the buyer's plan and the metric point in different directions, the deferred piece is closer to a lottery ticket than to price.

It misleads in the other direction when the seller stays with real authority: ring-fenced accounts, and written promises that pricing, budgets and cost allocation cannot change without consent. Then "who sets the number" is no longer a one-word answer. Soft language — "ordinary course," "commercially reasonable" — does not do that work. Specific vetoes do.

And it treats each row alone, when real agreements combine them. Three clauses usually decide the outcome more than the ceiling does: the covenants, the acceleration clause (full payment if the buyer sells or closes the unit), and the settlement right — who may end the earnout early, and on what terms. eBay could, and did. A formula that never runs to term is not the formula on the page. Stacking metrics does not cure this either. Skype's earnout used three at once, and a parent that controls the product controls all three.

How to read a row before signing

Set the headline maximum aside and read across: who sets the number, and what is the buyer forbidden from doing. Then price the certain part of the deal as though the deferred part will never arrive. If the fixed amount alone is acceptable, the earnout is upside. If it is not, the earnout is being asked to do work that no contract does well when the other side holds every lever.