Representations and warranties are legally binding promises you make about your company during an acquisition. If any prove false, the buyer can "claw back" a portion of the purchase price. To protect yourself, build detailed disclosure schedules, negotiate "knowledge" and "materiality" qualifiers, and cap your financial liability through an escrow, basket, and cap.
Key takeaways
- Your exit isn't done at closing; reps & warranties create post-closing risk.
- The Disclosure Schedule is your #1 tool to neutralize claims. Be over-inclusive.
- Negotiate "knowledge" and "materiality" qualifiers on every possible rep.
- Model the math of the escrow, basket, and cap. This is your real financial exposure.
- For deals over $30M, push for Rep & Warranty Insurance to reduce escrow to near-zero.
- Start a "Disclosure Issues List" today, long before you have a buyer.
Your Biggest Financial Risk Isn't the Deal Price — It's the Indemnity Clause
You’ve agreed on a headline price for your startup. But the number in the press release isn't what you bank. The real number is what's left after months, or even years, of post-closing liability.
In your acquisition agreement, the "Representations and Warranties" section is where that liability lives. It feels like boilerplate, but it’s a minefield. A breach of these "reps" can trigger a "clawback," forcing you to pay back millions from your exit. This isn't a negotiation to phone in. It's a strategic battleground where you must actively defend your proceeds.
Forget the car analogies. In a startup acquisition, reps and warranties are a list of legally binding promises you, the seller, make to the buyer about the state of the company. They are statements of past and present fact. If any of those statements turn out to be untrue, you have breached the contract, and the buyer has a claim against you for financial damages.
To force disclosure: Asking you to "represent" that your financials are GAAP-compliant forces you to admit if they aren't.
To shift risk: If an unknown pre-existing problem surfaces after closing (like a data breach), it's your financial responsibility, not the buyer's.
As a kill switch: If the buyer discovers a material breach before closing, they can walk away from the deal.
Your agreement will have dozens of reps. These are the categories that matter most, and the non-obvious traps within each.
These reps state that your company is a legally sound entity and you have the right to sell it. The key rep here is about your cap table.
Common Mistake: You promise the cap table is 100% accurate. But you forgot about a verbal promise of 0.1% to a contractor on a napkin three years ago. This is now a breach. Your cap table must be perfectly audited and reflect all issued and promised equity. No exceptions.
You promise your financial statements are accurate and there are no hidden debts.…
Non-…
Frequently asked questions
- What's the real difference between a 'rep' and a 'warranty'?
- Lawyers distinguish them, but in an M&A context, they function as a single set of legally binding promises. A 'rep' is a statement of fact (e.g., 'the company is incorporated'), while a 'warranty' is a promise of a condition (e.g., 'the seller has the right to sell the shares'). A breach of either leads to the same outcome: a potential claim against you.
- What happens if a major rep is found to be false *before* closing?
- This gives the buyer a 'termination right.' If they discover a material issue you failed to disclose — for example, that you're in the middle of a major lawsuit — they can walk away from the deal scot-free before it ever closes.
- What are 'fundamental reps' and why do they have a higher liability cap?
- Fundamental reps cover the absolute basics of the deal, like your company's proper incorporation, your authority to sign the deal, and your ownership of the shares being sold. Because a breach here undermines the entire transaction, your liability for them is typically capped at the full purchase price, not the general 10-15% cap.
- Does Rep & Warranty Insurance (RWI) cover all possible breaches?
- No. RWI policies have specific exclusions. Crucially, they do not cover issues you explicitly disclosed in your disclosure schedules. They also won't cover fraud or breaches of certain fundamental reps.
