Founder risks often missed in SPA representations and warranties

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In a share purchase agreement (SPA), the representations and warranties clause does the most to shape a founder-seller's exposure, since a breach can trigger an indemnity obligation. In startup M&A the founder is often the seller personally, and signing without fully understanding what is being represented can leave unexpected liability after closing.

What to check before signing

• the scope of the representations, and whether they are qualified to matters reasonably confirmable or to material matters
• the knowledge and materiality qualifiers attached to each clause
• whether IP such as source code and trademarks touched by contractors or side-project members has actually transferred to the company
• privacy and labour risk, such as whether the privacy policy matches actual data handling and whether outsourcing is properly distinguished from employment
• the balance between the indemnity cap, its survival period and any de minimis threshold, relative to the sale price

The risk allocation behind the long, detailed clauses

Representations and warranties are often long and easy to skim past, but they translate what the buyer found in due diligence into contractual liability, making them central to SPA negotiation. Typical representations cover proper incorporation, valid share issuance, no breach of key contracts, no unpaid tax or social insurance, no litigation, IP properly belonging to the company, and no APPI violation. Errors in any of these can leave the seller liable, so a founder should read the scope of each clause carefully.

Knowledge and materiality qualifiers

A knowledge qualifier limits a representation to what the seller actually knows; a materiality qualifier limits it to significant matters. Buyers tend to seek broad representations, while an unqualified promise covering matters a founder could not fully verify can be a heavy burden. Since early-stage documentation is often incomplete, it is worth considering, clause by clause, whether the promise can be limited to what is reasonably confirmable or material.

IP and the development team

IP representations are an easy blind spot. Where outside contractors or joint-research partners were involved, confirm whether rights in the deliverables have transferred and a moral-rights waiver exists; a missing contract or unclear relationship with a past developer can become a breach risk. Where generative AI was used, the AI service's terms and third-party rights risk may be checked too.

Personal data, labour and tax are easy to miss too

A privacy policy that does not match actual practice, an unclear line between outsourcing and employment, unpaid overtime risk, or tax filing issues can surface after closing as an indemnity claim or price dispute. Founders tend to know the business well but not every labour or tax risk, so reviewing these representations with legal, accounting and labour specialists is worthwhile.

Indemnity cap and survival period

Check the cap, survival period and any de minimis threshold on indemnity for a breach. Whether the cap is disproportionate to the sale price, and how long liability survives, are central to the seller's negotiating position, so general representations are sometimes distinguished from fundamental, tax, labour and IP representations for this purpose.