A Quick Guide: How to Protect Yourself in Fundraising and M&A Deals

3 Minutes

When raising funds or planning an exit, understanding warranties and disclosures against warranties is key.

Here’s a quick guide to help you navigate this complex landscape, applicable to both venture capital (VC) transactions and mergers and acquisitions (M&A), with some differences in approach.

Common Elements in VC and M&A Transactions

  • Warranties: Promises about the business’s health and condition.
  • Disclosure Letter: The fundamental document listing the exceptions (disclosures) to these warranties.
  • General vs. Specific Disclosures: General refers to publicly known facts; specific addresses particular details.
  • Fair Disclosure Standard: Disclosures must be clear, detailed, and not misleading, enabling investors or buyers to assess risks accurately.
  • Differences in Approach

    Venture Capital Transactions

  • Focus: Often centers around growth potential, IP, and market position.
  • Scope: Typically more limited warranties compared to M&A deals.
  • Investor Expectations: Investors expect disclosures on key aspects such as IP status, customer contracts, and financial projections. The onus is on the founders to flesh out the problems to be fixed.
  • Risk Allocation: Founders and the company bear more risk, with warranties ensuring transparency about potential issues.
  • Mergers and Acquisitions

  • Focus: Comprehensive view covering financial health, liabilities, and operational aspects.
  • Scope: Extensive warranties covering all aspects of the business.
  • Buyer Expectations: Buyers expect thorough disclosures on financial statements, liabilities, employment matters, and compliance issues.
  • Risk Allocation: Buyers often take on more risk, with detailed disclosures helping them evaluate the business thoroughly.
  • What Constitutes Fair Disclosure?

    Fair disclosure means providing clear, comprehensive, and specific information that leaves no room for ambiguity. The disclosed facts should allow the buyer or investor to make an informed decision, reflecting all material aspects of the business. Avoid hiding critical details or using overly broad language; instead, be as transparent and precise as possible.

    Insights from the Infiniteland case

    The Infiniteland case emphasises ensuring disclosures are “fair” by being specific and comprehensive. Examples include providing access to key documents, detailed explanations of potential issues, and making sure all information is easily understandable and accessible.

    Best Practices

      1. Be Detailed: Vague disclosures won’t suffice.
      2. Update Regularly: Keep information current.
      3. Seek Legal Advice: Craft thorough and precise disclosure letters.
      4. Communicate Openly: Transparency builds trust.

    If you are considering which law firm to work with on your next fundraise or considering an exit, do get in touch with us at Avery Law and reach out to David Turney or Björn Benckert on LinkedIn.