Deal Structure
Rewarded Default
Also known as: Incentivized default, structural default incentive
A deal structure where the buyer comes out ahead by not paying deferred consideration on time — or at all. Subordination, offset rights, buyer-controlled earnout targets, and flat simple interest make non-payment low-cost and low-risk, so delay or default becomes the rational play rather than a failure.
WHY IT MATTERS
Founders assume a buyer who owes them money — a seller note, an earnout, an escrow release — has every incentive to pay. In a rewarded-default structure, the incentives run the other way. The buyer holds the founder’s deferred money, deploys it in the business or new acquisitions, and earns more on it than it costs to keep it — especially when the note carries simple interest, so the carrying cost never escalates. At the same time, the structure makes non-payment cheap to get away with: seller notes sit behind senior debt that can block distributions, offset rights let the buyer net indemnity or earnout claims against what it owes, buyer-controlled EBITDA can keep earnout targets out of reach, and weak enforcement standing leaves the founder with no practical way to force payment. None of this requires the buyer to breach the contract — the terms simply make delay, or outright default, the economically rational choice. The defense is to attack the incentives before signing: compounding interest, pari passu or limited subordination, hard standstill and cure limits, independent enforcement standing, and earnout protections that take the payout decision out of the buyer’s hands.