Structuring an Earn-In Agreement for an Ontario Small Business

An earn-in can be a genuinely good way to bring a successor, key employee, or partner into ownership of an Ontario business — but only if the agreement behind it actually says what happens in every scenario that matters. Vague earn-in arrangements — "you'll get a piece of the business once things work out" — are a common source of disputes precisely because nothing specific was ever agreed. This article walks through the core terms a properly structured earn-in agreement should cover.

Start With the End State

Before drafting any milestones, both sides need to agree clearly on what full completion looks like:

• What percentage, or what specific number of shares, is being earned in total?
• Is it one class of shares, or does the incoming owner get a different class with different rights during the earn-in period?
• Over roughly what timeframe is this expected to play out?

Working backward from a clearly defined end state makes every other term easier to draft consistently.

Core Terms Every Earn-In Agreement Should Address

• [ ] What specifically triggers vesting — time, performance, or a combination
• [ ] Whether vesting happens gradually or in defined tranches
• [ ] What happens if the incoming owner voluntarily leaves before completion
• [ ] What happens if the incoming owner is terminated for cause versus without cause
• [ ] What happens if the existing owner dies, becomes incapacitated, or wants to sell to someone else mid-earn-in
• [ ] Whether the incoming owner has any voting or information rights before full vesting
• [ ] How the business is valued for any buyout that happens partway through
• [ ] Whether non-compete or non-solicitation obligations apply if the arrangement ends early
• [ ] How disagreements about whether a milestone was actually met get resolved

Setting Milestones That Are Actually Measurable

Vague milestones are the single most common weakness in earn-in agreements. "Grow the business" or "perform well" invites disagreement later about whether the target was met. Milestones that hold up better are ones that can be checked against a record:

• A specific revenue or profit figure over a defined measurement period.
• Continued active, full-time service for a stated length of time.
• Completion of specific, objectively verifiable achievements — for example, securing a defined number of new client contracts, or completing a transition of specific customer relationships.

Whatever the metric, the agreement should also specify exactly how and when it's measured, and by whom — leaving that open is almost as risky as leaving the milestone itself vague.

Vesting: What Happens If the Earn-In Doesn't Finish

Because ownership only vests as milestones are met, an earn-in that stops partway through generally just stays incomplete — the incoming owner keeps whatever has already vested, and the rest simply doesn't transfer. But this needs to be spelled out, including:

• Whether any already-vested shares need to be bought back, and on what terms, if the person leaves.
• Whether unvested rights are simply forfeited, or whether there's a wind-down payment reflecting value already contributed.
• How quickly the parties need to act once it's clear the arrangement isn't continuing.

Valuation Triggers and Why They Need to Be Set Now

Almost every earn-in eventually needs a valuation — for a partial buyout, for calculating a final purchase price, or for resolving a disagreement about what's owed if the relationship ends early. Deciding the valuation method only after a dispute has already started is exactly the wrong time to do it, since each side will naturally favour whichever method helps them. Address in advance:

• What valuation method or formula applies, and whether an independent business valuator is used.
• Whether different valuation approaches apply depending on the reason the earn-in is ending — a voluntary departure versus the business owner's own decision to sell, for example.
• Who pays for the valuation process itself.

Protecting the Business Owner During the Earn-In Period

An earn-in agreement shouldn't just protect the incoming owner's path to ownership — it needs to protect the existing owner too, particularly around:

• Confidentiality obligations that survive if the arrangement ends without completing.
• Limits on the incoming owner's authority to bind the business or make major decisions before full vesting.
• What information the incoming owner is, and isn't, entitled to see during the earn-in period.

Frequently asked questions