Earn-out Shares and RSUs in De-SPAC Transactions: What Companies and Executives Need to Know

The surge of SPAC (Special Purpose Acquisition Company) transactions in recent years has reshaped how private companies enter the public markets. Alongside this trend, earn-outs have become a common—and often heavily negotiated—feature of de-SPAC deals. While earn-outs are typically associated with target shareholders, some transactions have extended similar concepts to management and employees, either through “earn-out shares” or specially structured RSU (restricted stock unit) awards.

This blog explores how earn-out shares generally function, why they are usually tied to shareholders, and the less common but significant cases where they are designed for management. We also highlight U.S. examples, including SomaLogic and Sema4/GeneDx, to illustrate the different legal and regulatory approaches to earn-out arrangements.

What Are Earn-Out Shares?

At their core, earn-out shares represent contingent consideration—a portion of the merger consideration that is payable only if certain post-closing milestones are achieved. These milestones are often tied to the trading price of the combined company’s stock or specific financial or operational targets.

For example, target shareholders might receive additional shares if the company’s stock price closes above $20 for a set period within 24 months after closing. If the milestone is achieved, they “earn” the additional shares; if not, those shares remain unissued.

This structure helps bridge the valuation gap between the SPAC and the target company: shareholders believe the business is worth more, while the SPAC investors want to ensure that premium value materializes in the public market.

Earn-Outs for Shareholders vs. Management

Traditionally, earn-outs are shareholder-focused—a mechanism to pay legacy equity holders additional compensation for their stock if post-closing conditions are met. They are spelled out in the merger agreement and included in the registration statement (often the F-4 or S-4).

For management and employees, however, the landscape looks different. Incentive compensation is more commonly delivered through:

• Equity incentive plans (options, RSUs, or performance stock tied to service or performance);
• Performance bonuses, contingent on similar metrics;
• Rollover equity subject to vesting or forfeiture conditions.

While these may mirror earn-out logic (unlocking value based on future performance), they are rarely referred to as “earn-out shares.” Instead, they are generally structured as incentive equity, falling under SEC registration on Form S-8 as part of a compensatory plan.

Extending Earn-Out Shares to Management: Rare, But Possible

That said, some transactions do extend earn-out mechanics beyond shareholders to key employees or service providers. This is less common but noteworthy. Two recent deals highlight the distinction:

A.     SomaLogic (Nasdaq: SLGC) / CM Life Sciences II

In SomaLogic’s de-SPAC with CM Life Sciences II, the merger documents defined Earn-Out Shares as merger consideration not only for legacy stockholders but also for certain “Earn-Out Service Providers.” These included employees or service providers designated by the board and required to sign an Earn-Out Award Agreement.

This structure placed employees directly alongside shareholders in receiving earn-out consideration—a relatively rare approach. Importantly, these earn-out shares were not part of SomaLogic’s equity incentive plan, but rather part of the negotiated merger consideration.

B.    Sema4 / GeneDx (Nasdaq: WGS)

By contrast, the Sema4/GeneDx transaction illustrates the more typical path. Here, the company created “Earn-Out RSU Awards”—restricted stock units that vest upon meeting specified stock price triggers. The Form of Earn-Out RSU Agreement emphasized that these RSUs were granted separately from the company’s 2021 Equity Incentive Plan.

However, because these were compensatory in nature and designed for employees and management, they were ultimately registered on Form S-8. The company filed multiple S-8 registration statements (including No. 333-260481 and No. 333-262338) to cover shares issuable upon the vesting of these earn-out RSUs. This ensured compliance with securities regulations for equity compensation, even though the awards were not technically part of the existing incentive plan.

Legal and Regulatory Considerations

The differing treatment of earn-outs for shareholders versus management has important legal and regulatory implications:

1. Merger Consideration (Shareholders)
   • Governed by the merger agreement;
   • Disclosed in the F-4/S-4 registration statement;
   • Classified as contingent consideration for accounting purposes;
   • Not registered on Form S-8, because they are not compensatory awards.
2. Incentive Compensation (Management/Employees)
   • Structured as RSUs, options, or bonuses;
   • May be tied to the same performance metrics as shareholder earn-outs;
   • Must be registered on Form S-8 if publicly tradable shares are to be issued;
   • Accounted for under ASC 718 as equity compensation expense.
3. Practical Takeaways for Companies and Executives

• Understand the distinction: Shareholder earn-outs are merger consideration; management earn-outs are typically incentive compensation. Mixing the two can create accounting and disclosure complexities.
• Draft carefully: If extending earn-out shares to employees, ensure proper documentation (e.g., Earn-Out Award Agreements) and clarity on whether they fall within or outside existing incentive plans.
• Register properly: Employee earn-out RSUs often need to be covered by a Form S-8 registration statement, even if described as “outside” the incentive plan.
• Set aligned incentives: While shareholder earn-outs protect against overvaluation, management earn-outs (through RSUs or bonuses) can align executives’ interests with long-term stockholder value creation.
• Expect scrutiny: The SEC has increased its focus on SPAC disclosures, including how earn-outs are described and accounted for. Clear disclosure of who benefits from earn-outs—and on what terms—is essential.

Conclusion

Earn-outs are a versatile tool in SPAC and M&A transactions, but their application differs significantly depending on whether the recipients are shareholders or management. Shareholders usually receive earn-out shares as contingent merger consideration, while management more often receives incentive-based RSUs or bonuses.

Rare exceptions—like SomaLogic—show that employees can sometimes be granted earn-out shares directly as part of merger consideration. More commonly, as in Sema4/GeneDx, management earn-outs are structured as RSU awards registered on Form S-8.

For companies considering a SPAC or other M&A transaction, careful planning and documentation are critical. Getting the legal, accounting, and regulatory treatment right can help avoid surprises post-closing and ensure that incentives are properly aligned between shareholders, management, and investors.

Torres & Zheng at Law, P.C., regularly advises clients on SPACs, de-SPACs, and M&A transactions. If you would like us to assist with your transaction, please contact our team.

Contact Person: Nick L. Torres, Esq. and Zhiqi Zheng, Esq.