Escrow
A portion of acquisition proceeds held by a third party to cover potential post-closing claims.
Definition
In an acquisition, a portion of the purchase price (typically 5-15%) is held in escrow by a third party for 12-24 months. The escrow protects the buyer against undisclosed liabilities, breaches of representations, or other claims that emerge after the deal closes. If no claims are made during the escrow period, the funds are released to the sellers.
Why it matters
If your company is acquired, you may not receive your full payout immediately. The escrow holdback means 5-15% of your proceeds are delayed by 1-2 years. In rare cases, escrow funds may be used to settle claims and you receive less than expected.
Example
Your company is acquired for $100M with a 10% escrow. You are entitled to $50,000 of the proceeds. You receive $45,000 at closing and $5,000 is held in escrow. If no claims arise within 18 months, the remaining $5,000 is released to you.