What is Escrow?
A slice of the purchase price held by a third party after close to cover any breaches of the seller's representations.
In an acquisition, escrow is the buyer's safety net. A portion of the price - commonly 10% to 15% - is parked with a neutral escrow agent for a set period (often 12 to 24 months) and released to sellers only if no indemnification claims arise. If the buyer discovers the seller misrepresented something material (undisclosed liabilities, IP gaps, tax problems), they claim against escrow first. Why it matters to you: escrow money is yours in name but not in hand. A larger or longer escrow means more of your proceeds are at risk and delayed. Founders negotiate escrow size, duration, and whether it's the buyer's sole and exclusive remedy - so claims can't reach beyond the escrow to your personal pocket.
Example
- On a $40M sale, $5M (12.5%) sits in escrow for 18 months. With no claims, it releases in full to the selling shareholders pro rata to their ownership.