Legal & Compliance
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Quick Answer
Statements of fact made by a seller in an M&A transaction that the buyer relies on — breaches can result in indemnification obligations.
Representations and warranties (reps and warranties) are factual statements made by a company (and sometimes its founders) in a purchase agreement. Common reps: the company is duly organized, financial statements are accurate, there are no undisclosed liabilities, IP is owned by the company, no pending litigation, employees have signed IP assignment agreements. If a rep turns out to be false (breach), the seller must indemnify the buyer for resulting damages. This creates post-closing liability for startup founders in acquisitions — one reason deal counsel reviews reps carefully. Representations and warranties insurance (RWI) transfers the risk of rep breaches to an insurer rather than sellers, allowing founders to receive full proceeds at close.
In Practice
When Acme Corp acquires TechStart for $50M, TechStart's founders provide reps and warranties covering key areas like intellectual property ownership, financial accuracy, and legal compliance. They warrant that all 15 patents are properly assigned to the company, that the last three years of financials are materially accurate, and that there are no pending lawsuits. If six months post-closing Acme discovers that TechStart was actually infringing on a competitor's patent, this would breach the IP warranty and trigger the indemnification clause, potentially requiring the founders to pay damages up to the escrow amount of $5M.
Why It Matters
Reps and warranties determine who bears the risk of unknown problems in an acquisition. For sellers, overly broad warranties can create massive post-closing liability that persists for years. For buyers, weak reps and warranties mean limited recourse when problems surface. The negotiation around these provisions often makes or breaks deal economics—a seller might accept a lower purchase price in exchange for narrower warranties and shorter survival periods. Understanding these provisions is crucial because they directly impact how much money actually ends up in founders' pockets.
VC Beast Take
Most founders treat reps and warranties as boilerplate until they get hit with an indemnification claim two years later. The trend toward broader warranties and longer survival periods heavily favors buyers, but smart sellers are pushing back by negotiating caps, baskets, and knowledge qualifiers. We're seeing more deals structure around shorter warranty periods with higher escrow amounts—a compromise that gives both sides more certainty.
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Representations and warranties (reps and warranties) are factual statements made by a company (and sometimes its founders) in a purchase agreement. Common reps: the company is duly organized, financial statements are accurate, there are no undisclosed liabilities, IP is owned by the company, no...
Understanding Representations and Warranties is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Representations and Warranties falls under the legal category in venture capital. This area covers concepts related to the legal frameworks and compliance requirements in venture capital.
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