All founders have to deal with lawyers and def docs in their journey of raising capital. In most of my experiences, first time founders need to rely much on lawyers to navigate and negotiate these documents.
I’ll try to simplify some of the key (read: too legal) clauses of def docs — starting with super confusing — Representations & Warranties (R&W).
R&Ws and Indemnities is always one of the most heavily negotiated points in def docs. Founders are expected to back Company R&Ws and indemnify (read: assume financial liability) on behalf of Company , though this is more prevalent in late-stage funding/exit transactions.
(Note: R&W Insurances exist but are quite uncommon in early startup funding stages)
Below is a simple framework for understanding Company R&Ws and negotiating these as a founder:
1. Fundamental R&Ws: Typically includes shareholding and cap table, authority/validity of company, “material” compliances with applicable Laws
2. Business R&Ws: Everything related to the Business, e.g. Financial Accounts — prepared in compliance with accounting standards, Valid Contracts & no defaults, No restrictions on entering into the def docs, etc.
c. Operations — Running operations in ordinary course of business and no existing situation that can threaten “going concern” of the company
d. Compliance with Laws — incl. licenses if any, environment laws, employee and labor laws, Statutory compliances
e. Litigation — No ongoing litigation / legal disputes
f. Tax R&Ws — Compliances with applicable taxes, no tax demands outstanding
g. Intellectual Property — No “infringement” claims on IP (patent, trademark, copyrights, etc.) of the Company
Some investors include IP as a fundamental warranty where it is critical for the business (esp tech / brand-rich companies)
Isn’t it super easy to follow? Feel free to write for any questions. Will talk about “Indemnities” in my next post.
