This paper studies how firms use earnouts, a contingent payment contract in mergers and acquisitions, to manage valuation risks under uncertainty. Earnouts are widely applied in mergers and acquisitions with private targets, increasing from almost 0 to more than 30% in the past twenty years. I find that the usage of earnouts positively correlates with uncertainty of the target firms. Deal completion rates increase significantly with earnouts. Acquirers experience positive cumulative abnormal returns when earnouts are used to reduce valuation risks and to incentivize target management, when there are higher misvaluation risks and moral hazard problems in the target firm. However, acquirers experience negative CAR when earnouts are improperly used. Earnouts create potential problems in the post-acquisition period. After the transaction, acquires’ objective is to maximize firm value, while targets’ objective is to maximize earnout payments. Such incentive misalignment destroys firm value.