Warranties and Indemnities in Startup Share Sales: What Founders Are Actually Signing Up For

When a startup founder sells shares — whether in a full acquisition, a secondary sale, or an investor-led exit — the share sale agreement will contain a set of warranties and indemnities. For first-time founders, these clauses can look like standard legal boilerplate. They are not. They are the mechanism through which a buyer allocates risk back to the seller, and getting them wrong can leave you personally liable for claims that dwarf the proceeds you received.

This guide explains what warranties and indemnities actually mean in the context of an Australian startup share sale, how they differ from each other, and the key protections founders should negotiate before signing.

What Are Warranties?

A warranty is a statement of fact made by the seller about the company being sold. In a share sale agreement (often called an SPA), the seller warrants that certain things are true — about the company’s finances, its intellectual property, its compliance with laws, its contracts, its employees, and more.

A typical SPA for an Australian startup acquisition might include warranties covering:

• Financial statements — that the accounts are accurate and prepared in accordance with Australian Accounting Standards.
• Tax — that all tax returns have been lodged, all taxes paid, and there are no outstanding disputes with the ATO.
• Intellectual property — that the company owns or has valid licences for all IP used in the business, and that no third party has asserted infringement claims.
• Material contracts — that all material contracts are in force, no party is in breach, and no change-of-control provisions would be triggered by the sale.
• Employment — that all employee entitlements (including superannuation, leave, and any applicable modern award obligations) are fully paid and up to date.
• Litigation — that there are no pending or threatened legal proceedings against the company.
• Compliance — that the company complies with all applicable laws, including the Privacy Act 1988 (Cth), the Australian Consumer Law, and any sector-specific regulations.

If a warranty turns out to be untrue — for example, the company had an undisclosed tax liability or a key contract contained a change-of-control termination right — the buyer can bring a claim for breach of warranty. The measure of damages is generally the difference between the value of the shares as warranted and their actual value, assessed under ordinary contractual principles.

What Are Indemnities?

An indemnity is different. Where a warranty is a statement of fact that may give rise to a damages claim if breached, an indemnity is a promise to reimburse the buyer for a specific category of loss on a dollar-for-dollar basis.

Indemnities are typically used for known or identified risks — issues that emerged during due diligence and that the buyer wants ring-fenced protection against. Common examples in startup share sales include:

• Tax indemnity — covering any pre-completion tax liabilities that were not reflected in the accounts.
• Specific litigation — if due diligence reveals a pending or threatened claim, the seller may indemnify the buyer against the outcome.
• Employee claims — covering unfair dismissal, underpayment, or entitlement claims that relate to the pre-completion period.
• IP clean-up — if the company’s IP assignment chain is incomplete (a common issue in startups where early contractor agreements were informal), the seller may indemnify against claims arising from that gap.

The practical difference matters. For a warranty claim, the buyer must prove loss and its quantum using ordinary principles — including the duty to mitigate. For an indemnity claim, the buyer simply claims reimbursement for the specified loss. There is no need to prove the loss was foreseeable, no obligation to mitigate (unless the indemnity says otherwise), and no reduction for contributory conduct. Indemnities are, dollar for dollar, more favourable to the buyer.

Who Gives Warranties — The Company or the Founders?

This is where startup share sales diverge from large-cap M&A. In a big corporate acquisition, the selling entity gives the warranties and has the balance sheet to back them up. In a startup exit, the buyer often wants the founders personally to stand behind the warranties — either alongside the company or on their own.

There are good reasons for this from the buyer’s perspective. If you are acquiring a startup and the purchase price is being paid to the shareholders, the company itself may have limited assets post-completion. A warranty from the company alone is only as good as the company’s ability to pay a claim. The founders, who received the sale proceeds, are the parties with the economic benefit — and the buyer wants recourse against them.

For founders, this creates real personal exposure. If you sell your startup for $5 million and give uncapped personal warranties, a warranty breach could theoretically require you to return the entire purchase price — or more, if the buyer’s loss exceeds what you received.

Joint and Several vs Several Liability

Where multiple founders give warranties, the SPA will specify whether their liability is joint and several or several only.

Joint and several means the buyer can claim the full amount from any one founder, regardless of that founder’s shareholding or personal involvement in the breach. If your co-founder made a representation about the company’s tax position that turned out to be wrong, you could be on the hook for the full claim.

Several liability means each founder is responsible only for their proportionate share — usually based on their percentage of the sale proceeds. This is significantly better for founders and should be a baseline negotiating position.

The Disclosure Letter

The disclosure letter is the seller’s primary defence against warranty claims. It works like this: the SPA contains a broad set of warranties, and the disclosure letter identifies specific exceptions — matters that the seller is disclosing to the buyer as qualifications to those warranties.

If a warranty states that “there is no pending or threatened litigation against the company,” but the company is in fact defending an employment claim, the seller discloses that claim in the disclosure letter. The buyer is then treated as having purchased the shares with knowledge of that issue, and cannot later bring a warranty claim in respect of it.

For founders, the disclosure letter is not an afterthought — it is the single most important document for managing warranty liability. Every issue that could give rise to a warranty claim should be disclosed, specifically and in detail. A vague or incomplete disclosure letter is worse than no disclosure letter at all, because it creates a false sense of protection.

Practical tips:

• Start the disclosure process early. Do not leave it until the night before completion. Go through the warranty schedule line by line and identify every matter that needs disclosure.
• Be specific. “The company may have some outstanding employee entitlement issues” is not a disclosure. “The company owes Jane Smith $12,500 in accrued but unpaid annual leave as at 30 June 2026” is.
• Attach supporting documents. Where a disclosure relates to a contract, dispute, or liability, attach the relevant correspondence, agreement, or notice as part of the disclosure bundle.

Limitation of Liability: Caps, Baskets and Time Limits

No founder should give unlimited warranties. The SPA should contain a set of limitations on the seller’s liability for warranty and indemnity claims. The key limitations to negotiate are:

Overall Cap

The maximum aggregate amount the seller can be liable for under all warranty claims combined. In Australian startup M&A, this is commonly set at between 20% and 100% of the purchase price, depending on the deal dynamics. Founders should push for the lowest cap the buyer will accept — ideally no more than the proceeds they personally received.

Fundamental warranties (title to shares, capacity to enter the agreement) are often carved out of the cap, meaning liability for those warranties is uncapped. This is market standard and generally acceptable.

De Minimis Threshold

A minimum dollar amount below which an individual warranty claim cannot be brought. This prevents the buyer from pursuing trivial claims. A typical de minimis for a startup acquisition might be $10,000 to $50,000, depending on the deal size.

Basket (Aggregate Threshold)

An aggregate dollar amount that the buyer’s total warranty claims must exceed before any claim can be made. There are two types:

• Tipping basket: Once claims exceed the threshold, the buyer can recover from the first dollar. For example, if the basket is $100,000 and total claims are $120,000, the buyer recovers $120,000.
• True deductible: The buyer can only recover amounts above the threshold. Using the same example, the buyer recovers $20,000.

Founders should push for a true deductible where possible, as it provides more meaningful protection.

Time Limits

The SPA should specify a deadline after which warranty claims can no longer be brought. In Australia, the limitation period for a contractual claim is six years under most state limitation statutes — but the SPA can (and should) contract this to a shorter period. For general warranties, 18 to 24 months post-completion is common. Tax warranties and indemnities often run longer — typically until the expiry of the relevant ATO amendment period (usually four years, or longer for fraud or evasion).

Warranty and Indemnity Insurance

Warranty and indemnity (W&I) insurance has become increasingly common in Australian M&A, including in larger startup exits. A buy-side W&I policy allows the buyer to claim against the insurer rather than the seller for warranty breaches, effectively giving the founders a cleaner exit.

W&I insurance does not cover everything. Insurers typically exclude known issues (anything disclosed or identified in due diligence), forward-looking warranties, and certain categories of loss such as penalties and fines. The premium is usually 1% to 2% of the policy limit, and the question of who pays it is a negotiation point.

For founders, W&I insurance can be a powerful tool — particularly where the buyer is insisting on broad warranties and high caps. If the buyer has W&I coverage, there is less commercial justification for imposing heavy personal liability on the selling founders.

What Founders Should Push For

Every share sale negotiation is different, but founders selling a startup should aim for:

1. Several liability only — not joint and several.
2. A meaningful overall cap — ideally tied to proceeds received, not the total purchase price.
3. A true deductible basket rather than a tipping basket.
4. Time limits of 18–24 months for general warranties, with longer periods only for tax and title.
5. Warranty qualifiers — warranties qualified by “so far as the seller is aware” where the seller cannot reasonably verify the underlying facts.
6. A thorough disclosure letter — prepared early and with specificity.
7. W&I insurance where deal size justifies the premium.
8. Escrow rather than personal recourse — if the buyer insists on a holdback or retention, it should come from the purchase price held in escrow rather than creating an open-ended personal claim against the founders.

The Bottom Line

Warranties and indemnities are not legal decoration. They are the risk allocation framework of the entire transaction. For founders, they determine how much of the sale proceeds you actually keep if something goes wrong after completion.

Take them seriously. Read the warranty schedule in full. Invest time in the disclosure letter. Negotiate the limitations. And understand that what you sign on completion day may matter far more than the headline purchase price.