Navigating the Transaction: What Founders Get Wrong About Deal Structure
Earnouts and rollovers can align interests beautifully—or lock you into years you didn't plan for.
The term sheet looked exceptional. A private equity firm was offering my client 8x EBITDA for his manufacturing company—well above what comparable businesses had fetched. The deal structure included a significant earnout tied to hitting revenue targets over three years, plus the opportunity to roll 30% of his equity into the new entity for "a second bite at the apple."
His advisors were enthusiastic. This was the outcome they'd worked toward: a premium multiple with additional upside potential. The earnout would let him capture value from the growth initiatives already in motion. The rollover meant participating in future gains while taking substantial chips off the table now.
He asked me what I thought. I asked him what he wanted to be doing in three years.
He hesitated. He'd been imagining a clean break—time with his family, maybe a board role or two, space to figure out what came next. The deal on the table would give him none of that. He'd be working harder than ever, hitting aggressive targets for a new owner with different priorities, unable to sell his rolled equity until they achieved their own exit years down the road.
The premium multiple wasn't really a premium. It was compensation for years of his life he hadn't agreed to sell.
I call this the Second-Bite Trap—the pattern where deal structures that look like upside functions as constraints. It's one of the most common mistakes I see when coaching founder-CEOs through business exit strategy, and it catches founders precisely because the terms sound so appealing.
Deal Structures That Look Like Opportunity But Aren't
The Second-Bite Trap shows up in several common deal structures. Each can be genuinely beneficial under the right circumstances—or genuinely problematic under the wrong ones. The trap isn't in the structures themselves, but in accepting them without clear-eyed evaluation of what they actually require.
Earnouts are the most common second-bite structure. The buyer pays a portion of the purchase price upfront, with additional payments contingent on hitting future performance targets. On paper, this aligns incentives: you get more if the business performs well. In practice, earnouts often create situations where you're working harder than ever to hit targets you no longer fully control—because the buyer now makes decisions about resources, strategy, and priorities that affect your ability to perform.
Equity rollovers let you retain ownership in the combined entity rather than cashing out entirely. The pitch is compelling: participate in the upside you're helping create, benefit from the new owner's growth capital and expertise, and potentially earn more than you would have from a straight sale. The reality is that your wealth is now tied to an illiquid investment controlled by someone else, and you may be locked into your role for years while waiting for their eventual exit.
Extended employment agreements keep you actively running the business post-close. Sometimes this is structured as part of the transaction; sometimes it's framed as a separate arrangement. Either way, the effect is that you've sold your company but not your job. You're now working for someone else, often reporting to a board with different operating philosophies, watching decisions get made that you wouldn't have made.
Consulting arrangements and board roles create ongoing involvement without the employment relationship. These can work well when genuinely advisory, but sometimes they're disguised ways of keeping you on the hook for transition work, customer relationships, or institutional knowledge without the commitment of a formal role.
Each of these structures has legitimate uses. Earnouts make sense when there's genuine uncertainty about business value and both parties want to share the risk. Rollovers work when you're genuinely excited about the combined entity's prospects and comfortable with the liquidity timeline. Extended involvement serves everyone when you want to be part of the next chapter. The trap springs when you accept these structures without understanding what they actually require from you—or when you accept them because of their financial appeal without considering their fit with your life goals.
Why These Structures Are So Seductive
Founders fall into the Second-Bite Trap for several understandable reasons.
First, the financial logic is seductive. Every founder does the math: if I hit my earnout targets, if the rolled equity compounds, if the new owner creates the value they're projecting—the total payout could be dramatically higher than a straight sale. That math is often correct. What founders undervalue is the probability-weighted cost of the time and energy required to realize that upside, and the opportunity cost of what else they might have done with those years.
Second, advisors are incentivized toward these structures. An earnout that might pay an additional $5 million increases the total deal value on which the investment banker earns fees. A rollover counts toward total consideration. From the advisor's perspective, these are features, not bugs. Their enthusiasm may not reflect your interests.
Third, the comparison point is wrong. When you're evaluating a deal with earnout upside against a deal without it, the earnout deal looks better on expected value. But the right comparison isn't deal-with-earnout versus deal-without. It's deal-with-earnout versus deal-without plus the value of your time freed for other pursuits. Many founders who struggle through three years of earnout effort would have created more value (and more happiness) by taking a clean deal and deploying their energy toward something new.
Fourth, there's a status element. Accepting a second-bite structure can feel like confidence in the business you built—rolling equity signals that you believe in the growth story. Declining can feel like hedging, taking chips off the table, not playing to win. This framing conflates financial structure with founder identity in unhelpful ways. Sometimes the confident move is to recognize that the next chapter of this company's story doesn't need to be your story anymore.
What You're Actually Trading Away
The costs of the Second-Bite Trap are often invisible at signing but become painfully clear over time.
You lose autonomy precisely when you expected to gain it. The whole point of an exit, for many founders, is to create freedom—time, options, the ability to choose what you work on. Second-bite structures do the opposite. You're still working, often harder than before, but now within constraints set by someone else. You've sold the company but bought yourself a job, often one that's less satisfying than the job you had before.
Your wealth remains concentrated and illiquid. Rolled equity ties your financial future to a single investment you can't sell. Earnout payments depend on performance you can't fully control. Instead of diversified liquid wealth, you have concentration risk in an illiquid asset. Sophisticated wealth advisors would never recommend this portfolio construction—yet founders accept it because it's attached to "their" company.
The relationship with the buyer often deteriorates. Early enthusiasm gives way to friction over priorities, resources, and decision authority. The earnout creates adversarial incentives: the buyer wants to invest in long-term initiatives that might depress short-term performance; you want to hit your numbers. These conflicts are structural, not personal, but they poison the working relationship and make those earnout years miserable even if the targets are ultimately achieved.
You delay the identity transition that was coming anyway. One of the hardest parts of exiting is shifting from "founder of this company" to whatever comes next. Second-bite structures let founders avoid that transition by keeping one foot in the old identity. But the transition is inevitable—it's just been pushed back by three or five years, and often made harder because now you have years of frustration and exhaustion layered on top of the identity question.
Evaluating Deal Structures on Your Terms
Founders who avoid the Second-Bite Trap do something counterintuitive: they're willing to take less money for more freedom.
This isn't financial naiveté—it's a sophisticated understanding of what they're actually optimizing for. They've done the Exit Blueprint work to clarify their post-exit vision, and they recognize that certain deal structures fundamentally conflict with that vision, regardless of their financial upside.
The key practice is explicit trade-off analysis. Before engaging with deal structures, articulate what you would trade for what. Would you accept 10% less purchase price for a clean break with no earnout? Would you forego rollover upside to have liquid wealth you can deploy elsewhere? Would you leave potential money on the table to avoid three years of employment with a new owner? These aren't abstract questions—they're the actual decisions embedded in deal structuring.
Smart founders also stress-test second-bite assumptions ruthlessly. If the earnout depends on hitting targets, what happens if you miss? If the rolled equity assumes a five-year hold, what happens if it's seven? If the employment agreement assumes a collaborative relationship with the new board, what happens if it's adversarial? The optimistic scenarios are always easy to imagine. It's the downside scenarios that reveal whether the structure actually works.
They evaluate second-bite structures against their opportunity cost. The years you'll spend working toward an earnout or holding illiquid rolled equity are years you could spend on something else. What would that something else be worth? This isn't just a financial calculation—it's a time-of-life calculation. For a founder in their mid-fifties, three years of earnout effort might be years they'd rather spend with aging parents or growing grandchildren. For a founder with a burning desire to start something new, those years are a startup runway sacrificed to administrative duties at a company they no longer control.
When second-bite structures do make sense, they negotiate them carefully. Not all earnouts are created equal. Targets should be tied to metrics you can actually influence, with clear definitions that prevent dispute. Rollover terms should include liquidity provisions that protect against indefinite hold periods. Employment agreements should specify clear decision authority, reporting relationships, and exit conditions. The details matter enormously, and founders who accept standard terms often regret the specific provisions they didn't negotiate.
Testing Whether a Deal Structure Actually Serves You
Here's a quick diagnostic to assess whether you're at risk for the Second-Bite Trap:
Imagine a deal with your target financial outcome, but structured as 100% cash at close with no earnout, no rollover, no post-close involvement beyond a brief transition. How do you feel about that deal? If your answer is "great, that's what I want," you should be skeptical of any structure that looks different. If your answer is "I'd be leaving money on the table," examine whether that money is worth the years of your life required to capture it.
Look at any second-bite structures currently on the table or recently discussed. For each one, write down specifically what it would require from you—not what it might provide, but what it would require. Hours per week. Years of involvement. Decision authority you'd give up. Liquidity you'd defer. If you can't articulate the requirements specifically, you don't understand the deal well enough to accept it.
Ask yourself honestly: Am I attracted to second-bite structures because they align with my post-exit vision, or because I haven't fully accepted that I'm ready to leave? Sometimes the appeal of ongoing involvement is really the founder's reluctance to confront the identity transition that a clean exit requires. Second-bite structures can be a way of avoiding that harder work.
Finally, talk to founders who have lived through earnouts, rollovers, and extended employment. Not the success stories your banker tells—the full range of experiences. Ask them what surprised them, what they'd do differently, and whether the additional money was worth the additional time. Their answers should inform your decision.
Where to Start
Begin by clarifying your post-exit vision with enough specificity that you can evaluate deal structures against it. If you want a clean break, say so explicitly and design your negotiating strategy around it. If you're genuinely excited about ongoing involvement, be specific about what kind of involvement, for how long, under what conditions. Vague preferences get overridden by deal momentum.
When evaluating any second-bite structure, build a "walk-away analysis." What's the minimum you'd accept to avoid this structure entirely? If a buyer offered straight cash equal to that amount, would you take it? If the answer is yes, the second-bite structure isn't adding value for you—it's only adding value for the buyer.
Negotiate second-bite structures as aggressively as you'd negotiate purchase price. Earnout targets should be achievable under realistic assumptions, tied to metrics you influence, with protections against manipulation. Rollover terms should include puts, calls, or other liquidity mechanisms. Employment agreements should have clear exit provisions. Most founders negotiate price hard and terms soft—that's backwards.
Get advice from people who have no stake in the transaction closing. Your M&A attorney and investment banker are valuable, but they benefit when deals close. A coach, a mentor, or a trusted advisor who's paid regardless of outcome can give you the perspective that transaction professionals often can't.
And remember: taking less money for more freedom is a legitimate choice. It may even be the optimal choice. The goal isn't to maximize the number on the closing statement. It's to execute a transaction that serves your actual life.
Questions for You and Your Team
Before moving on, take a few minutes to reflect on these questions. The goal isn't to have perfect answers—it's to surface whether the Second-Bite Trap might be affecting your evaluation of deal structures.
If the earnout, rollover, or continued involvement on the table required you to work at 80% intensity for three years, what would you not be doing during those years? Is the additional money worth that trade-off? This forces you to calculate opportunity cost, not just potential upside.
Imagine the worst realistic scenario for the second-bite structure—missed earnout targets, extended illiquidity, adversarial relationship with the new owner. Would you still accept the deal knowing that outcome was possible? Stress-testing assumptions reveals whether you're making decisions based on realistic expectations or optimistic projections.
Is the appeal of continued involvement about financial upside, or about not being ready to leave? This question requires honest self-assessment. Sometimes what looks like financial sophistication is really emotional avoidance.
Take the Next Step
If you want to see where your business stands on the dimensions buyers scrutinize most closely, take the Exit Readiness Assessment. It's a free 15-minute diagnostic that scores your business across six dimensions—and helps you understand what would move your valuation.
Take the Exit Readiness Assessment
If you'd like help evaluating deal structures, negotiating terms that serve your goals, or thinking through the trade-offs embedded in second-bite arrangements—I offer a free 60-minute consultation.
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About the Author
Bruce Eckfeldt is a strategic business coach and exit planning advisor who helps founder-CEOs of growth-stage companies scale systematically and exit successfully. A former Inc. 500 CEO who built and sold his own company, he brings real-world operational experience to strategic planning and leadership development. He's a certified ScalingUp and 3HAG/Metronomics coach, Certified Exit Planning Advisor (CEPA), an Inc. Magazine contributor, and host of the "From Angel to Exit" podcast. Bruce works with growth companies in complex industries, guiding leadership teams through growth challenges and exit preparation. Reach him at bruce@eckfeldt.com with any questions or if you want more information or to book a call with him.
