Special purpose acquisition companies are back. After the SPAC market cratered in 2022 and 2023, deal volume roared back through 2025 and into 2026, with SPACs now accounting for a majority of U.S. IPO deal count in some quarters. But the resurgence has come with a twist: investors, PIPE providers, and regulators are all scrutinizing sponsor compensation far more closely than they did during the 2020–2021 boom. At the center of that scrutiny sits a single structural feature,the “promote”,and the mechanism increasingly used to tame it: the earnout.
Understanding how these two pieces fit together is essential for anyone evaluating a SPAC, whether as a public investor, a private company weighing a de-SPAC merger, or an employee whose equity is riding on the outcome.
What the Promote Actually Is
A SPAC is a shell company with no operations, formed purely to raise cash in an IPO and hunt for a private business to merge with. The people who create it,the sponsor,put up a small amount of “risk capital,” typically covering formation costs and a private placement of warrants worth roughly 2–8% of the amount raised in the IPO. In exchange for that modest outlay, the sponsor receives founder shares, commonly called the promotion, equal to about 20% of the SPAC’s post-IPO equity.
The math is what makes the structure controversial. On a $200 million SPAC, a sponsor might contribute around $5 million and walk away with founder shares worth roughly $40 million if a merger closes at net asset value. That 20% stake comes directly out of the pie that would otherwise belong to public shareholders,it’s dilution, not new value. Sponsors often layer on additional upside through warrants, which appreciate further if the combined company’s stock rises after the merger.
The promotion exists to compensate sponsors for sourcing deals, conducting diligence, and bearing the risk that the SPAC never finds a target and has to liquidate. But because the promotion typically converts in full the moment a merger closes,regardless of whether that merger turns out to be a good one,it has historically rewarded deal completion over deal quality. A sponsor generally does better closing a mediocre merger than liquidating and returning capital to shareholders, since liquidation usually means the sponsor’s own investment evaporates.
Why Earnouts Emerged
Earnouts are the market’s attempt to fix that misalignment. Rather than letting the full promote vest automatically at closing, sponsors agree to put a portion of their founder shares at risk, subject to forfeiture unless the post-merger stock hits specified performance thresholds within a set window,commonly five years or longer.
A typical structure ties vesting to the stock price, clearing a level such as $12.50 or $15.00 (against a $10 reference price) and staying there for a sustained period, say 20 out of 30 trading days. Many deals split the earnout into multiple tranches with escalating thresholds, so a sponsor might recover an additional slice of the promotion at $12.50, another at $15.00, and another at $17.50, with each tranche requiring the stock to actually hold that level rather than briefly touch it. Some agreements instead,or additionally,tie vesting to operating milestones like revenue or EBITDA targets rather than share price alone. If the company never reaches the threshold before the term expires, the unvested shares are cancelled outright.
This isn’t limited to sponsors. Target-company shareholders and management sometimes receive their own earnout shares as part of the merger consideration, used to bridge valuation gaps between what the SPAC is willing to pay upfront and what target owners believe the business is worth. In some transactions, earnout-linked restricted stock units are extended to key employees as well, registered separately from standard equity incentive plans.
Empirical research on the mechanism has found that earnouts genuinely help. A structural analysis of the SPAC market estimated that for every 10-percentage-point increase in the share of a sponsor’s promotion tied to earnout conditions, non-redeeming shareholder returns rose by roughly 1.8 percentage points,a meaningfully larger effect than trimming warrant issuance produces. The logic is straightforward: when sponsors only get paid if the stock performs, they’re pushed to find and negotiate better deals rather than simply rushing any transaction across the finish line before the SPAC’s clock runs out.
The Limits of the Fix
Earnouts reduce misalignment, but they don’t eliminate it. Legal scholars examining SPAC mergers from the 2021 vintage found that among deals that adopted earnouts, the forfeitable shares typically represented only 30–40% of the total promotion,meaning the majority of founder shares still vested unconditionally at closing. Even a sponsor whose earnout shares end up worthless generally comes out ahead of a sponsor who let the SPAC liquidate, since liquidation forfeits the sponsor’s own capital contribution too. In other words, an earnout blunts the incentive to complete a bad deal; it doesn’t reverse it entirely.
There’s also a valuation and accounting layer that makes earnouts genuinely complex. Because vesting depends on future, uncertain events, earnout shares typically must be valued using Monte Carlo simulation and re-measured every reporting period after the merger closes, feeding into the same fair-value machinery used for the warrant liabilities that have triggered restatements at numerous post-SPAC companies. For sponsors and target companies, this means earnout terms aren’t just a negotiating chip,they carry real, ongoing financial-reporting consequences.
Regulators Have Caught Up
The SEC weighed in directly in January 2024, adopting final rules,effective July 2024,that require far more detailed disclosure of sponsor compensation, dilution, and conflicts of interest in both SPAC IPO prospectuses and de-SPAC merger proxies. Sponsors must now disclose the nature and amount of all compensation they stand to receive, any arrangements influencing whether to proceed with a given merger, and material conflicts that could color that decision. The rules also require the private target company to become a co-registrant on de-SPAC filings, exposing it to disclosure liability it previously avoided, and impose a mandatory 20-day period for shareholders to review proxy materials before voting.
Regulators framed the changes as an attempt to bring SPAC investors the same protections available in a traditional IPO. For readers who want a deeper comparison, see our guide on the difference between a SPAC and a traditional IPO. Practitioners have largely described the rules as codifying practices that sophisticated market participants, particularly institutional PIPE investors—were already demanding.
What It Means for the Current Cycle
The SPAC market re-entering 2026 looks structurally different from its 2021 predecessor. Average deal sizes have grown, redemption rates remain extremely high as investors treat SPAC IPOs as a short-term, low-risk parking spot rather than a long-term bet, and PIPE investors now scrutinize sponsor promote and earnout terms with a rigor that was largely absent four years ago. Sponsors with strong track records are increasingly expected to put meaningful portions of their promote at risk as a condition of getting institutional capital to the table at all.
For anyone evaluating a SPAC deal today,as an investor, a target company, or an employee with equity on the line,the promote and its earnout provisions are no longer fine print. They’re the clearest signal available of whether a sponsor’s incentives are actually pointed toward building long-term value or simply getting a deal done.