So assuming you get a short time limit of <2yrs, would it be smart to stick it in a low risk account somewhere and not touch it until that term is up? Or was that the intent of the escrow?
I'll suggest that the escrow route is an alternative to agreeing to indemnification in a simpler form; I can't imagine a situation where having both would be of benefit to the seller at least.
I think ideally escrow would nicely encapsulate risk for a seller and ramp it down over time. When applied to cash it could create tax issues if a payment is recognized as income in one tax year and only becomes available in a subsequent year. For shares received by exchange for existing shares structured as a merger, this is likely solvable. If a selling party holds only stock options though and is issued shares on closing, again, my initial guess would be that would be deemed a "taxable event." Another aspect of escrow is that it eventually requires sign-off from the buyer to release it to you, effectively giving them control of your proceeds that they might attempt to exercise outside of the original intent of the escrow.
So, as for handling your windfall during the indemnification period, yes, purely the simplest approach would be to hold the proceeds in the most risk-free way until your indemnification period ends.
This is however, again complicated at least by tax implications if you need some of the money to pay taxes due on cash received in the closing.
Furthermore, there is a strong argument for using some cash to hedge against a decline in the value of shares received (if any), simplistically illustrated by purchasing put options on the acquiring company's stock, since you're forced to hold it throughout some inevitable lockup period. Put options on a reasonably closely-correlated financial instrument might also be viable if the acquiring company isn't so large as to have an active options market, since public stock prices seem to move broadly, barring any company-specific failures.
To put some entirely fictional numbers to the hedging argument, imagine you're obligated to sit on $10M worth of public stock for two years and you could spend $250K cash today to gain a significant level of protection against a drop in the share price. After your two-year wait, you either have $10M or more in stock if the price held or rose ($250K is gone but you spent it on insurance of a sort) or perhaps the stock dropped 80% and you now have $2M in stock but another $4M made back from the put options you bought, so while $6M pre-tax isn't $10M, it's a lot more than $2M.
