Glossary · Fundraising process · Updated
Warranties and indemnities are the undertaking by which founders guarantee to the investor that the information provided about the company is accurate. If a liability originating before completion surfaces afterwards, founders bear the financial consequences within the negotiated limits.
The mechanism answers a real information asymmetry: an investor cannot verify everything, even with thorough due diligence, so they buy partly on the strength of your statements. Warranties turn those statements into a contractual undertaking, which is legitimate in principle.
Everything is in the parameters, and all of them are negotiable. The cap limits maximum exposure, the threshold sets a floor below which nothing is payable, the duration bounds the risk period, and the scope of the statements determines what is actually warranted. An uncapped or open-ended warranty is not a market standard.
The best way to reduce exposure is to disclose known risks rather than hide them. A dispute listed in the disclosure schedule falls outside the warranty and becomes a negotiation point; the same dispute discovered after completion engages your personal liability.
Example: warranty terms on a seed round
A €1.5M round, warranties given by the two founders.
| Cap | 30% of the amount invested, so €450,000 |
|---|---|
| General duration | 3 years from completion |
| Tax and social security duration | aligned with the applicable limitation periods |
| Aggregate threshold | €15,000, nothing is payable below it |
| Per-claim threshold | €3,000, small claims excluded |
| Security for the warranty | 5% of the round in escrow, or a bank guarantee |
| Split between founders | pro rata to their holdings, several and not joint |
| Example claim: social security reassessment | €60,000 on an earlier year, covered |
The most important line is the absence of joint liability: under a joint clause, one founder can be pursued for the entire claim and then has to recover from the other.
The common mistake
Accepting joint and uncapped warranties as a formality. It is the only document in a round that puts your personal assets at risk beyond your shareholding, and it survives your departure from the company.
Frequently asked questions
What are warranties and indemnities?+
A contractual undertaking by founders that the information given about the company at the time of the deal is accurate. If a liability originating before completion later emerges, a tax reassessment or a dispute for instance, founders bear the cost within the negotiated cap, threshold and duration.
What cap is standard?+
On a European seed round, a cap of 20% to 30% of the amount invested is common, with a general three-year duration extended for tax and social security matters. A warranty equal to 100% of the amount invested, or with no cap at all, should be challenged.
Related terms
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