Designing retention that works
Why buyers insist on it
In a technology acquisition, the people who built the product hold knowledge no data room captures. If two senior engineers leave in the first six months, the buyer’s integration plan and revenue case can both fail. Retention pools turn that risk into a cost the buyer can price and control.
Typical structures
| Structure | Typical size | Vesting | Best for |
|---|---|---|---|
| Cash retention bonus | 25% to 100% of salary a year | 2 to 3 years | Most deals |
| Buyer equity or RSUs | 1% to 5% of EV | 3 to 4 years | Listed or PE buyers |
| Milestone bonus | Varies | On delivery | Integrations and product launches |
| Rollover equity | 10% to 30% of proceeds | Until next exit | Founders and senior managers |
Getting the numbers right
The award needs to beat a competing offer. As a rule, a cash award below about 30% of base salary a year rarely changes a decision to leave. Concentrating the pool on fewer people often works better than spreading it thinly across everyone.
Retention and the price
Retention pools interact with earnouts and rollover equity, and all three affect what shareholders receive at close. Model the full package with the LOI value decoder and the earnout modelling tool.
Frequently asked questions
- What is a retention pool in an acquisition?
- A retention pool is money, shares or options set aside to keep key employees after a deal closes. It vests over time, usually two to four years, so people are rewarded for staying through the integration.
- How big should a retention pool be?
- Most lower and mid-market deals set aside 1% to 5% of enterprise value. Talent-led technology acquisitions, where the team is a large part of what is being bought, can go well above that.
- Who pays for the retention pool?
- It is usually funded by the buyer on top of the purchase price, but some buyers carve it out of the price. Agree which in the letter of intent, because a carve-out reduces what shareholders receive.
- Cash or equity for retention?
- Cash is simpler and certain; equity in the buyer aligns people with the combined business but depends on its value. Many deals mix both, with cash weighted to the first year and equity to later years.
- What is a good vesting schedule?
- Three years with a 12-month cliff is the most common pattern. Longer cliffs tend to push people to leave before the first vest; monthly or quarterly vesting after the cliff keeps the incentive steady.