Warranties and the disclosure letter: the founder's real protection
What a warranty is, why investors ask for forty of them, how the disclosure letter turns a liability into a shield, what to disclose, and what happens if you get it wrong.
Somewhere in the investment agreement is a schedule of warranties: thirty or forty statements about the company that you confirm are true. Accounts are accurate. No litigation. IP is owned. No undisclosed liabilities. Founders sign them without reading because the lawyers seem relaxed. Then, a year later, an investor who wants their money back reads them very carefully indeed. Understand what you are signing and use the tool that protects you: the disclosure letter.
What a warranty is
A statement of fact that, if untrue when given, lets the investor claim damages for the loss it caused. It is not a guarantee of the business's future — investors take that risk — it is a guarantee that what they were told about its present is true. The practical effect is to push the risk of undisclosed problems onto the company (and sometimes the founders) rather than the investor.
Why investors ask for forty
Because they cannot check everything in diligence, and the warranties make you do the checking. The list is standard and long: corporate matters, accounts, tax, contracts, employees, IP, property, litigation, data protection, insurance, insolvency. At seed the list should be shorter than at Series A and the protections tighter.
The protections to negotiate
- Who gives them. The company, not the founders personally, wherever possible. If founders must give them, capped at a fraction of their shareholding's value, not the whole investment.
- Cap. Total claims limited to the amount invested (market), not unlimited.
- Time limit. Claims must be brought within 12–24 months (tax warranties longer, often six years).
- De minimis and basket. No claims under, say, £5k, and none until total claims exceed £25k. Stops nuisance claims.
- Knowledge qualifier. Where sensible, warranties given "so far as the founders are aware, having made reasonable enquiry" — not absolute.
The disclosure letter
This is the document that saves you. Anything disclosed in it is carved out of the warranties: if you warrant "no litigation" and disclose "we have a dispute with a former supplier over £8k", the investor cannot later claim on that dispute. The letter has two parts: general disclosures (the data room, public registers, the accounts) and specific disclosures against each warranty. The specific ones are where the work is.
What to disclose
Everything you would rather they heard from you. The customer who is threatening to leave. The contractor whose IP assignment you never got signed. The VAT return that was late. The director's loan. The co-founder who left with shares. The product feature that does not quite work the way the deck implied. Disclose it precisely, with the documents, and it stops being a liability. Hide it and it becomes a warranty claim with your name on it.
Founders worry that disclosure will scare investors. It does the opposite: an investor who reads a thorough disclosure letter concludes they are dealing with someone who knows the business and is straight about it. A thin letter followed by a discovery in month six is what scares investors — off the cap table and into litigation.
What happens if you get it wrong
An untrue warranty, not disclosed, that causes loss: the investor claims. At seed, claims are rare and usually settled — nobody wants to sue a company they own a fifth of — but the leverage is real, and a founder who has been shown to have hidden something has lost the relationship whatever the outcome. Honest mistakes, disclosed late, are usually forgiven. Concealment is not.
Questions founders ask
"Can I refuse to give warranties?"
Not really; no investor will fund without them. You can negotiate who gives them, the cap, the time limit and the qualifiers — and you can disclose.
"The investor's draft has founders giving warranties personally and uncapped."
Push back. Market at seed is company warranties capped at the investment; personal warranties, if any, capped low. A solicitor will get this moved in one round of comments.
"How long does the disclosure letter take?"
Two or three days if the data room is done. It is the data room, reorganised against the warranty list, plus the things you know and nobody asked.