Warranties in investment agreements: Essential founder's guide

Frequently Asked Questions

What exactly are warranties in an investment agreement?

Warranties are legally binding promises you make to investors about the current state of your business at the time of investment. If a warranty turns out to be false, investors can claim compensation for any losses they suffer as a result. These aren't casual assurances - they create personal liability if breached.

What's the difference between a warranty and an indemnity?

Warranties require investors to prove they suffered loss because a statement was false, while indemnities create direct payment obligations if certain events occur regardless of whether actual loss occurred. Indemnities are promises to compensate investors for specific losses, whereas warranties are statements about your company's current condition.

Can I protect myself from warranty claims by disclosing known issues?

Yes, anything properly disclosed in your disclosure letter before signing cannot later be claimed as a warranty breach. You should work through each warranty systematically and disclose even minor issues - it's better to over-disclose than face a claim later. However, investors typically require that issues be explicitly pointed out in the letter, not just buried in supporting documents.

How much can I be liable for if a warranty is breached?

Most agreements cap total warranty claims at 50-100% of the investment amount, so if investors put in €500,000, you might be liable for up to €250,000-€500,000. However, fundamental warranties about company existence and share ownership often have higher caps or no cap at all. There are also typically minimum thresholds of €10,000-€25,000 in total claims before you're liable for anything.

How long do investors have to bring warranty claims against me?

Investors typically have 18-24 months to bring claims for most business warranties, though tax warranties usually extend to seven years to match Revenue's assessment window. Claims must be formally notified before the deadline expires - once time runs out, you're no longer liable even if a breach occurred.

Am I personally liable for warranty breaches or just the company?

Investors typically want both the company and founders to give warranties, which means your personal assets are at risk if claims succeed. The company's liability is limited to its assets (which may be minimal after investment is spent), so founder personal liability creates real financial exposure you need to manage through proper disclosure and negotiation.

What happens if I have co-founders - are we each liable for our share?

When multiple founders give warranties, you're usually jointly and severally liable, meaning investors can pursue any founder for the full amount, not just their proportionate share. If one founder cannot pay, the other founders must cover their share, creating risk if you have co-founders with different financial positions.

What financial information do I need to warrant is accurate?

You'll warrant that financial statements present a true and fair view of the company's position, with all assets and liabilities properly recorded and valued. You're also promising there are no undisclosed debts, guarantees, or contingent liabilities, and that management accounts provided during due diligence are accurate and prepared consistently with prior periods.

Do I need to warrant that my company owns all its intellectual property?

Yes, you'll warrant that all IP used in the business is either owned by the company or properly licensed, and that all employees and contractors have assigned their IP rights through proper agreements. You're also stating there are no pending or threatened IP disputes that could undermine the company's competitive position.