Accelerators · Fundraising

indemnification of investors by founders - what's acceptable?

Ephraim Ben Dor

December 5th, 2016

I am in the process of raising funds. The investors submitted a draft that requires not just the company but also the founders personally to idenminfy the investors for any damages that they may incur due to misrepresentation or warranties given to the investors by the company. This is essentially like giving a "personal guarantee" wherein the investor can go after the founders personally. I generally don't have a problem with this and the terms are limited in scope. I wanted to ask if anybody has experience with this request and if it is a standard request.

Mindy Barker Passionate executive working with entrepreneurial companies to improve profitability, value and cash flow

December 6th, 2016

I would speak to an insurance professional about obtaining D&O coverage and see if that will work for investors rather than a personal guarantee. Make certain each Founder pays close attention to the reps and warranties in the closing documents. Frequently everyone is so excited to get money and they just sign and do not pay attention to the details. With or without a personal guarantee or D&O this is the best way to begin a relationship.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

December 5th, 2016

If you make a misrepresentation in connection with the sale of shares in your company you are generally liable.  Indemnification protects the investors against claims by third parties based upon your misrepresentations.  It is a fairly standard clause.

Steve Simitzis Founder and CEO at Treat

December 5th, 2016

A personal guarantee isn't a standard term. Ask your lawyer to help you negotiate with the investor, and if you don't have a lawyer, do not sign these docs until you get a lawyer with experience in startup transactions.

Arthur Lipper Chairman of British Far East Holdings Ltd.

December 5th, 2016

All that is being asked of the entrepreneur is to tell the truth without embellishment in the offering document. The return of capital is not being sought, just a true presentation of data.

Martin Omansky Independent Venture Capital & Private Equity Professional

December 6th, 2016

This is not typical but not unknown. It is illegal to indemnify investors against investment losses in equity transactions, but indemnification against management malfeasance of all kinds is possible. I would be concerned about why the investors want such indemnification. Are they suspicious about the potential of bad behavior by the management? Sent from my iPhone

Martin Omansky Independent Venture Capital & Private Equity Professional

December 9th, 2016

Ben: we all should be wary of "standard drafts". Anyway, I agree with all of my colleagues that individuals can be held liable for misrepresentations in the offering documents and in other presentations such as "decks", poster presentations, pitches, discussions, etc. Whether a provision protecting investors from false claims is included in the investment documents or not is really irrelevant, because there are enforceable laws against fraud and misrepresentation at the Federal and State levels. Sent from my iPhone

Ephraim Ben Dor

December 9th, 2016

Martin, we are dealing with an accelerator.  this is their standard draft. Thank you everyone for your thoughtful comments and the time you dedicated to this.