The purchase price is the number founders celebrate when an offer lands. The reps and warranties section is where that number gets tested for years after you sign. Get your reps and warranties wrong, and you can be required to pay back or forfeit in escrow part of the purchase price.

For reps and warranties that prove to be untrue or incomplete, you may face a claim long after closing, or watch the buyer negotiate down the price before you sign.

I am a startup lawyer and a two-time software founder, and the reps and warranties section is the first thing I read in a purchase agreement. Here is what you promise, what it can cost, and where to push back.

What Are Reps and Warranties in a Purchase Agreement?

Reps and warranties are the promises about your business that you put in writing when you sell it. Every buyer asks for them, and almost every claim a buyer brings after closing starts with one.

A representation is a statement that something is true today, such as “the company has no pending lawsuits.” A warranty is a promise that the statement is accurate, which gives the buyer a contract remedy if it turns out to be wrong. Lawyers bundle the two together because, in practice, the purchase agreement treats them the same way: if one is inaccurate, the buyer can pursue indemnification (a contractual obligation for you to cover the buyer’s losses).

Here is the part many founders miss. Reps are a risk allocation tool more than a truth test. The buyer is asking you to carry the cost of anything about the company that turns out differently from what you said, so the drafting decides who pays for surprises.

Which Reps Have You Already Made to Investors?

If you raised on a SAFE (a Simple Agreement for Future Equity), you have already made reps about your company. Most founders never read that part of the document.

The standard post-money SAFE that Y Combinator publishes on its SAFE documents page includes a “Company Representations” section with five reps. In plain terms, you told your investors that:

1. 1The company is properly formed and in good standing in its state of incorporation.
2. 2The SAFE was properly authorized and is binding, and, to the company’s knowledge, the company is not violating its charter, its bylaws, or any material law or contract.
3. 3Issuing the SAFE does not trigger a violation, accelerate debt, or create a lien.
4. 4No consents are needed beyond corporate approvals and securities filings.
5. 5To its knowledge, the company owns or can obtain the IP rights its business needs.

Those same topics come back at exit, only bigger. The capitalization rep in a purchase agreement asks you to state exactly who owns what, so every SAFE, convertible note, option grant, and handshake equity promise has to reconcile to a signed document. A messy cap table is one of the fastest ways to turn a rep into a price cut.

What Reps Will a Buyer Ask a SaaS Company to Make?

A buyer’s first draft will cover your whole company, but a handful of reps carry most of the risk for software businesses. Here is how I triage them with founders before the first markup.

Three of these deserve a closer look.

IP Ownership and Contractor Code

The IP rep is where SaaS deals most often get repriced. Founders assume that paying a contractor to write code means the company owns that code, and under federal copyright law that assumption is usually wrong.

The US Copyright Office’s guide to works made for hire explains that a “work made for hire” covers work by employees within the scope of their jobs, or commissioned work in nine specific categories with a signed written agreement. Software is not one of the nine categories, so code from an independent contractor generally belongs to the contractor unless they signed an assignment to the company. If you cannot produce those assignments, the buyer will either demand that you go back and have all contractors and employees sign such an IP assignment before closing or ask for a special indemnity, which I cover in more depth in my guide to managing IP risk in acquisitions.

Customer Contracts and Revenue

Your material contracts rep says your key customer agreements are valid, in force, and will remain in force following the sale of the company. Many enterprise contracts contain an anti-assignment clause (the contract cannot be transferred without the customer’s consent) or a change-of-control clause (the customer can terminate if the company is sold). These make the contracts potentially worth less to a buyer.

On one deal where I represented the buyer, I found that the seller had non-assignment clauses with several of its biggest customers. Once the acquisition happened, those customers could have walked away, and that changed the conversation about price. Getting the customer to consent to assigning the contract to the buyer would remedy this impairment.

Deferred revenue is the other quiet issue: how do you handle cash you collected for service that would have to be provided by the buyer after closing? The buyer on the hook to provide that service treats it as a liability in the deal math. Your revenue reps need to match how your contracts actually bill, or you may suffer a reduction in the purchase price on account of the services the buyer is obligated to provide, for which you, rather than the buyer, have already been paid.

Privacy and Data Security

Buyers will ask you to represent that you have complied fully with the privacy laws that apply to your business and that you have had no data security breaches beyond those disclosed. Which laws apply depends on your users. California’s CCPA can reach companies with California users, and the EU’s GDPR can reach companies with users in the EU.

The common SaaS gap is a privacy policy that promises something the product does not actually do. Read your own policy against your data flows before the buyer does, and disclose any incident on your schedules instead of hoping it stays buried.

How Do Fundamental and General Reps Differ?

Most purchase agreements sort reps into two tiers, and the tier decides how long a rep lasts and how much a breach of that rep can cost you. The split looks like this in a typical deal:

• ●Fundamental reps cover the basics a buyer cannot live without: organization, authority to sign, capitalization, title to the shares or assets, and brokers’ fees. In my deals, the claims a buyer can bring above the escrow are usually fraud, capitalization, and taxes, and occasionally IP. These reps usually survive longest and often sit outside the general cap on liability for such a breach.
• ●General reps cover everything else: contracts, financials, litigation, employees, privacy, and operations. These usually survive for a shorter window and are subject to the cap and basket.
• ●Special or line-item indemnities sit outside both tiers. If diligence finds a specific known problem, such as missing contractor assignments, the buyer may ask you to cover that exact issue dollar for dollar.

Why does the clock matter so much? Delaware’s statute of limitations generally gives a party three years from when a contract claim accrues to sue. Under section 8106 of the Delaware Code, parties to a written contract involving at least $100,000 can set their own period, as long as the claim is brought within 20 years of accruing.

In other words, the survival clause in your purchase agreement is doing real work. A buyer who quietly expands the fundamental list, or lengthens its survival, is extending how long your sale proceeds stay at risk.

What Happens If a Rep Turns Out to Be Wrong?

When a rep is inaccurate and the buyer suffers a loss, the buyer makes an indemnification claim under the purchase agreement. Four levers decide how much of your money that claim can reach.

The Indemnity Cap

The cap is the maximum total amount you can owe for breaches of general reps. In the deals I see, caps for general reps typically land around 10% to 20% of the purchase price, with fundamental reps and fraud carved out to a higher limit.

An uncapped indemnity is the single most dangerous term a seller can miss. I had a client who had agreed to a $25 million acquisition and was already celebrating, and when I read the documents I found an uncapped indemnification clause, an earn-out with no seller protections, and disclosure schedules that were barely half finished.

The Basket

The basket works like an insurance deductible: the buyer has to accumulate losses above a threshold before it can bring a claim. The detail that matters is the type.

• ●A deductible basket lets the buyer recover only the losses above the threshold.
• ●A tipping basket lets the buyer recover everything back to the first dollar once losses cross the threshold.

Same threshold, very different outcome. Always ask which one the draft uses.

Escrow and Holdbacks

An escrow (or holdback) is a portion of the price the buyer does not pay you at closing, held back to cover claims. In my experience, escrows commonly hold about 5% to 15% of the price for 12 to 18 months. Treat that money as unpaid until the escrow releases, and plan your personal finances around the cash you actually receive at closing.

The Survival Period

The survival period is the window during which a buyer may still file a claim on a particular rep. General reps usually survive for a shorter period than fundamental reps, and the escrow release date often tracks the general survival period.

A Worked Example on a $20M Sale

Here is how the levers interact. The numbers below are illustrative, chosen to show the mechanics, and they do not describe a market standard.

Nothing in the price changed between the two columns. The terms are where the money quietly leaks, which is why I negotiate these four levers as one package.

How Do Knowledge and Materiality Qualifiers Shrink Your Exposure?

Qualifiers are a few words that narrow what a rep actually promises. They cost the buyer very little in negotiation and can save you a great deal in a claim.

A knowledge qualifier limits a rep to what you actually know, for example, “to the company’s knowledge, no customer intends to terminate.” The fight is over whose knowledge counts and whether it is actual knowledge or what someone “should have known” after reasonable inquiry (constructive knowledge).

You as the seller will want to limit knowledge to actual knowledge, whereas constructive knowledge is better for the buyer because it holds you, as seller, to a higher standard. With constructive knowledge, you can’t turn a blind eye and say “I didn’t know that,” because you are bound to make “reasonable inquiry.” Keep the knowledge group to a short named list; usually just the founders is best, but maybe include one or two executives if the buyer demands that.

A materiality qualifier limits a rep to issues that matter, for example “in all material respects.” A materiality scrape is the buyer’s counter: a clause that reads the materiality qualifiers out of the reps when calculating whether a breach happened, how much the loss is, or both. A double scrape removes them for both purposes, which makes your qualifiers far weaker than they look.

The bring-down is the closing condition that your reps must still be true on the closing date as well as on the signing date. If something changes between signing and closing, such as a large customer giving notice, the bring-down decides whether the buyer can walk away or renegotiate price.

Why Do Disclosure Schedules Matter as Much as the Reps?

Disclosure schedules are the exceptions list attached to your reps. When a rep says “there is no pending litigation, except as listed on Schedule 3.9,” the schedule is where you disclose any exceptions or deviations from the rep: here you would describe the open dispute with enough detail to clearly identify it.

By disclosing it, you allow the buyer to investigate, understand, and consider the implications of the disclosure. No surprises is in your best interest.

A properly disclosed item is your legal protection. If you disclose a problem, the buyer generally cannot treat it as a breach after closing, and if you bring an issue up yourself, you can usually manage it; if the buyer finds it on its own, it tends to create suspicion, can lead to buyer’s fear, and often leads to a renegotiation. Here is how I have founders approach the schedules:

• ●Draft the schedules yourself, with your lawyer asking a lot of questions to be sure all bases are covered, instead of letting the buyer’s team fill them in from the data room.
• ●Disclose broadly and specifically, naming the contract, the dispute, or the incident.
• ●Cross-reference each item to every rep it could touch. The introductory paragraph to the disclosure schedules can usually accomplish this.
• ●Update the schedules before closing if something changes, and know what the agreement says about updates.

Can a Buyer Claim on a Rep It Knew Was False?

Yes, in many cases, and founders are often surprised by this. The practice is called “sandbagging”: the buyer learns a rep is false before closing, closes anyway, and then claims indemnification.

In Arwood v. AW Site Services, decided in 2022, the Delaware Court of Chancery described Delaware as a “pro-sandbagging” jurisdiction.

The Arwood court also noted that drafters choose among three approaches: a clause that expressly permits sandbagging, a clause that bars claims on reps the buyer knew were false, or silence. As of that opinion, the Delaware Supreme Court had not squarely resolved the question, and other states treat it differently, so the governing-law clause matters.

Fraud is the other boundary, and the Delaware Supreme Court drew it in Express Scripts v. Bracket Holdings (2021) when it applied the framework from the Court of Chancery’s ABRY Partners decision. A party cannot contractually limit its exposure for its own conscious lies, but parties can agree to limit liability for reckless or negligent misstatements.

In practice, the definition of “fraud” in your agreement decides whether the cap protects you from a claim that you were careless, so keep it tied to deliberate, actual fraud.

Is Reps and Warranties Insurance Worth It for Your Sale?

Reps and warranties insurance (RWI) is a policy that pays the buyer for losses from breaches of your reps, so the buyer looks to the insurer instead of to your escrow. Buyers usually purchase the policy, and who pays the premium is a negotiated term.

For a seller, RWI can mean a smaller escrow and a lower cap on your own exposure, because the policy carries most of the risk. A few points to weigh before you rely on it:

1. 1Policies typically exclude issues the buyer already knows about, so known problems still need a special indemnity or a price adjustment.
2. 2The policy has its own retention (the insurance version of a basket), and the deal terms decide who covers losses inside it.
3. 3The underwriter runs its own diligence, which adds time and questions to your timeline.
4. 4RWI usually still leaves you exposed to fraud.

On smaller software deals, the cost and process can outweigh the benefit. Ask your lawyer to price both paths before you agree to either.

How to Negotiate Reps and Warranties as a Seller

The order of operations matters as much as the asks. Here is the sequence I walk founders through.

Step 1Settle the Risk Terms in the LOI

Once you sign the LOI, the deal is already about 90% decided, and your bargaining power drops sharply when you enter exclusivity. If the LOI says “standard” escrow and indemnity terms will apply, push back, because there is no such thing as standard. Get the cap, escrow size, and survival into the LOI in numbers.

Step 2Build the Data Room Before Exclusivity

Your reps are only as safe as your records. Pull signed IP assignments, the cap table backup, customer contracts, and privacy documents together before the request list arrives, and listen to my conversation on selling your SaaS business for how prepared sellers run this stage.

Step 3Push for Knowledge and Materiality Qualifiers

Ask for knowledge qualifiers on forward-looking and third-party reps (customer intentions, infringement by others, compliance with laws) and materiality qualifiers on compliance reps. Resist a double materiality scrape.

Step 4Keep the Fundamental List Short

Fundamental reps escape the cap and survive longest. Hold the list to the true basics, and push back if the buyer tries to move IP, privacy, or all tax matters into it without a specific reason.

Step 5Tie Caps, Baskets, and Escrow Together

Trade them as a package. A larger escrow can justify a lower cap, and a tipping basket can be offset by a higher threshold or a shorter survival period.

Step 6Define Fraud Narrowly

Make sure fraud means actual, deliberate fraud in the making of the reps, by named people, and that recklessness and negligence stay inside the cap. Also confirm the agreement says whether the buyer can sandbag, instead of leaving it to default law.

Frequently Asked Questions

Here are the questions founders ask me most often once they see the reps section of their first draft.

Conclusion

The reps section is where the buyer decides how much of your price is final. Know which reps carry SaaS risk, back each one with documents, disclose everything on your schedules, and negotiate the cap, basket, escrow, survival, and fraud definition as one package, ideally before the LOI, while you still have room to say no. If you want a founder who has sat on both sides of the table, my transaction support services cover exactly this.