Legal & Compliance
Escrow
Funds held by a neutral third party in an acquisition to cover potential post-closing liabilities — sellers receive escrowed funds after a holdback period.
In the context of startup acquisitions, escrow refers to a portion of the acquisition price held back by the acquirer (in a neutral third-party account) for a specified period (typically 12-18 months) to cover potential indemnification claims — breaches of representations and warranties, undisclosed liabilities, or tax issues. Typical escrow amounts are 10-15% of total deal consideration. The escrow protects acquirers from post-closing surprises they didn't know about when the deal closed. For startup founders and investors, escrow represents capital they've earned but can't access yet. Representations and warranties insurance (RWI) is increasingly used as an alternative to escrow, allowing sellers to receive full proceeds at close.