Representations & warranties

Hello startup enthusiasts!

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Happy New Year! We hope you had a chance to relax and spend some time with your loved ones over the holidays. New year, new me? If that’s your vibe, we’re cheering you on. But if not, no worries – there’s no need to change what works. On that note, we’re back with our monthly newsletter where we turn legalese into a language humans actually speak. This time, we’re diving into representations and warranties in investment agreements. Let’s do this.

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What are reps and warranties?

In an investment agreement, representations and warranties are the promises you make to investors to confirm key facts about your business. They’re all about transparency – showing that your business is exactly what you say it is. For example, you might represent that your financial statements are accurate. A warranty, on the other hand, could promise that nothing major has changed in your business since you shared them with investors.

These promises aren’t just legal formalities – they help investors feel confident they’re making a good decision. In funding rounds, representations typically cover things like IP ownership , compliance with laws, and the absence of hidden debts or lawsuits. Warranties go a step further by protecting investors from surprises before the deal officially closes.

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Why do they matter?

Reps and warranties are a big deal in investment agreements because they give investors a clear and honest picture of your startup’s current state. They need to know your IP is secure, your financials add up, and there aren’t any hidden risks like debts or lawsuits. Clear and accurate promises build confidence and keep the deal on track.

If your promises are vague or incorrect, the consequences can be serious. Deals might fall apart, trust could be lost, or you might face legal trouble like claims for damages. The more inaccurate the warranties, the worse the fallout – for you and your business.

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Dos and don’ts

Here’s what to do and what to avoid:

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Dos‍

• be honest about what’s missing – if you don’t fully own something, say so (“I own this IP, except for X and Y.”)
• match the scope of reps and warranties to your startup’s stage and the investor’s stake (VC deals don’t need reps and warranties fit for the private equity world)
• keep warranties tied to the company (especially in early-stage rounds)

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Don'ts

• give general warranties like “the company complies with all applicable laws” – stick to what’s realistic and industry standard
• agree to founder liability for things outside of their control and without a liability cap
• over-promise – if your company doesn’t have a bullet-proof privacy setup yet, don’t promise complete compliance

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In a nutshell

Reps and warranties build trust and keep deals moving in the right direction. They show investors the real picture – your IP, financials, and any risks, so there are no surprises later. Be honest, clear, and realistic without over-promising or agreeing to things beyond your control. A little transparency today saves a lot of trouble tomorrow.

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Want to know more about representations and warranties or any other investment related topic? We’re here to help! Reach out to our team or follow us on LinkedIn for more insights.

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See you next month!

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