Exits & Liquidity
Basket Threshold
A minimum damage amount that must be exceeded before indemnification claims can be made against sellers in an M&A transaction.
A basket threshold (or basket) in M&A sets a minimum aggregate amount of losses that the buyer must suffer before they can make indemnification claims against the sellers. There are two types: a deductible basket (where the buyer absorbs losses up to the threshold and can only recover excess amounts) and a tipping basket (where once the threshold is exceeded, the buyer can recover all losses from the first dollar). Baskets prevent nuisance claims and set a materiality floor.
In Practice
The acquisition agreement included a $1M deductible basket: the buyer had to absorb the first $1M in indemnifiable losses. When a $3M warranty breach was discovered, the buyer could only recover $2M from the escrow, with the first $1M effectively borne by the buyer.
Why It Matters
Basket thresholds directly affect the net proceeds from an acquisition. Sellers want high baskets (to minimize the risk of post-closing deductions), while buyers want low baskets (to maximize recourse). The negotiation typically lands at 0.5-1.5% of deal value.
VC Beast Take
The distinction between deductible and tipping baskets matters more than most deal lawyers admit. In a $100M deal with a $1M basket and $1.5M in claims, a deductible basket yields $500K in recovery while a tipping basket yields $1.5M — a 3x difference.
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