Cash, stock or earn-out: how startup acquisitions are paid in India

When one company buys another, the buyer has to pay the sellers in some form. The sellers are the founders, employees with shares and investors. The price can be paid in cash, in shares of the buyer, in promises of future payment, or in a mix of all three.

The mix matters because it decides how certain the money is. Cash at closing is certain. Shares of the buyer rise or fall in value. An earn-out is paid only if the acquired business hits agreed targets. Two deals with the same headline price can be worth very different amounts to the people selling.

In a cash deal, the buyer transfers money to the sellers when the deal closes, usually after approvals and checks are finished. For the sellers it is the simplest outcome: the price is fixed and there is no wait.

Cash deals are common when the buyer is a large, well-funded company, or when the target is small and the buyer wants control quickly. Even in a cash deal, a slice is often kept back for a while, which is covered further down.

In a share swap, the buyer pays by giving its own shares to the sellers instead of money. The sellers end up owning a part of the buyer. This suits a buyer that has little spare cash but shares that investors value highly, and it lets the sellers share in the combined company's future.

Under the Companies Act 2013, an Indian company that issues new shares for something other than cash must follow the rules for allotment of shares, including a valuation by a registered valuer, as of November 2026. When the buyer is a foreign company, a swap also falls under foreign exchange rules, the FEMA Non-debt Instruments Rules 2019, which require the price to follow prescribed valuation norms and, in many cases, a filing with the Reserve Bank of India (RBI).

• Swap with the seller's shares valued by a registered valuer, to show the exchange is fair.
• Buyer's new shares allotted to the sellers, who then become shareholders of the buyer.
• Possible lock-in on the shares received, so sellers cannot sell at once.
• Value of the deal changes if the buyer's own share value moves before the sellers can sell.

An earn-out is a part of the price that the buyer pays later, only if the acquired business meets set targets. The targets are usually about revenue, profit or customer numbers over one to three years after closing.

Buyers like earn-outs because they reduce the risk of overpaying for a startup whose growth may not continue. Sellers accept them when they believe in their own forecasts, or when the buyer will not pay a higher fixed price. Earn-outs are also a way to keep founders working after the sale, since a founder who leaves may lose the remaining payments.

• Fixed part: paid at closing, no conditions.
• Variable part: paid later, if the targets are met.
• Measurement: the agreement defines how revenue or profit is counted and who controls the business meanwhile.
• Dispute risk: disagreements over targets and accounting are a frequent cause of arguments after a deal.

An escrow account is a separate account run by a neutral party, usually a bank, where part of the price is parked after closing. A holdback is similar, except the buyer keeps the money itself. Both protect the buyer: if the sellers' promises about the company turn out wrong, the buyer can claim from this amount instead of chasing the sellers.

When one side of a share transfer is a person outside India, the FEMA rules limit how much can be deferred. As of November 2026, the NDI Rules allow up to 25% of the total price to be paid later, or kept in escrow, for up to 18 months from the date of the transfer agreement. Rules and clarifications change, and how they apply to Indian companies controlled by foreign owners has been debated, so the current RBI text and a FEMA adviser should be checked for a given deal.

A few ranges appear again and again in deal terms. They are market practice and the FEMA limit above, not legal minimums, and every deal sets its own.

• Deferred or escrowed share of the price under FEMA when a non-resident is involved: up to 25%, as of November 2026.
• Maximum deferral period under the same rule: 18 months from the transfer agreement.
• Typical earn-out period: often one to three years, set by the agreement.
• Typical escrow release: in stages, often tied to when the buyer's right to claim for breaches ends.

The sale price is shared among shareholders according to what they own and what rights their shares carry. Investors who hold preference shares usually have a liquidation preference, which means they may take their money back first, before common shareholders are paid. If the price is low, founders and employees may receive little even when the headline number sounds large.

Employees with vested stock options can usually be paid for them, while unvested options are often replaced by the buyer's own plan or tied to a retention bonus. Founders are commonly asked to stay for a period, and part of their payout may be linked to staying. Payments in later years carry risk, so the money received on day one is the safest part of the deal.

Words such as up to, valued at or including earn-out signal that part of the price is conditional. A headline that says an acquisition is worth a certain amount may include shares that can fall in value, or performance payments that may never happen.

It helps to ask four questions: how much is paid at closing, how much is in shares, how much depends on future results, and how much is held back. Many Indian deals do not disclose these splits, in which case the headline number should be read as a ceiling, not as a payout. This guide explains terms only. Deal terms and tax treatment vary, so check with a lawyer or chartered accountant for a real transaction.