Escrow Account

An escrow account is a third-party held account holding funds or other assets pending the satisfaction of defined conditions. Typically at a bank or escrow company, it is used in venture financings (rarely, typically for specific contingencies), M&A transactions (commonly, to secure rep-and-warranty obligations or earnout payments), and other commercial transactions where one party needs assurance that funds will be released only on defined terms. It is the structural mechanism for handling conditional payments and post-close obligations.

The standard structure:

Account creation: third-party escrow agent (typically a bank) opens an account.

Funding: party with funds wires them to escrow account.

Hold conditions: escrow agreement specifies what conditions must be met for release.

Release: when conditions are met (or specific period elapses), agent releases funds per instructions.

Dispute resolution: if conditions are disputed, agent holds funds until resolved.

Where escrow accounts appear in startup contexts:

M&A escrow holdback (most common): in acquisitions, typically 10-15% of purchase price held in escrow for 12-24 months to secure seller's rep-and-warranty obligations.

Earnout escrow: future contingent payments held in escrow until milestone achievement.

Investor escrow (rare): in syndicated rounds, sometimes investor funds held in escrow until all closing conditions met.

Litigation reserves: funds set aside for potential disputes.

Specific contractual contingencies: payments contingent on specific events.

Escrow vs holdback:

Escrow: third-party held account; specific structure.

Holdback: portion of purchase price withheld; can be in escrow or held by buyer directly.

Often used interchangeably: M&A escrow holdback typically refers to amounts held in third-party escrow.

The escrow agreement:

Escrow agent: typically named bank or escrow company.

Funds held: specific amount.

Hold period: typically 12-24 months for M&A escrow.

Release conditions: what triggers full or partial release.

Dispute mechanics: how disputes are resolved.

Fees: escrow agent charges fees (typically modest).

What founders get wrong: Not paying enough attention to escrow holdback terms in M&A negotiations because the focus is on headline purchase price. The right discipline: at M&A time, escrow holdback terms (size, period, conditions) are material; negotiate as carefully as headline price.

Related: Escrow Holdback · Closing Conditions · Definitive Agreement · Representations and Warranties · Acquisition

FAQ

What is an escrow account?
A third-party held account (typically at a bank or escrow company) holding funds or other assets pending the satisfaction of defined conditions. Used in venture financings (rarely), M&A transactions (commonly), and other commercial transactions.

Where do escrow accounts appear in startup contexts?
Most commonly in M&A: escrow holdback (10-15% of purchase price held for 12-24 months securing rep-and-warranty obligations). Also: earnout escrow (future contingent payments), litigation reserves, specific contractual contingencies. Rare in standard venture financings.

What's the difference between escrow and holdback?
Escrow: third-party held account; specific structure. Holdback: portion of purchase price withheld; can be in escrow or held by buyer directly. M&A escrow holdback typically refers to amounts held in third-party escrow. Often used interchangeably.