What should the representations and warranties in the note purchase agreement be?
Takeaway: The representations and warranties in a seed-stage financing are a standard, "light" set of factual statements about the company's good standing; they are designed to give investors basic assurance without the intense diligence of a priced round.
In any investment agreement, the company is required to make a series of "representations and warranties" (reps & warranties). These are legally binding statements of fact about the company's business and legal status as of the closing date. If these statements are later found to be untrue, the investor may have a legal claim against the company for breach of contract.
While the reps & warranties in a later-stage Series A financing or an M&A deal can be incredibly extensive and heavily negotiated, the reps in an early-stage convertible note or SAFE financing are intentionally "light." The goal of a seed round is speed and efficiency, so the reps are designed to be standard, non-controversial, and focused only on the most fundamental aspects of the company's legal health.
The Standard "Light" Reps & Warranties
A standard convertible note or SAFE purchase agreement will include a handful of core representations from the company, including:
Due Organization and Good Standing: A statement that the company is a duly organized and validly existing C-Corporation in good standing under the laws of Delaware.
Authorization: A statement that the company has the full corporate power and authority to sign the financing agreements and to issue the convertible note or SAFE.
Valid Issuance: A promise that the note or SAFE, when issued, will be a valid and legally binding obligation of the company.
No Conflicts: A representation that entering into the financing agreement does not conflict with the company's Certificate of Incorporation or Bylaws, or with any other major contract the company has signed.
Intellectual Property: A very simple representation that the company owns or has the right to use the intellectual property necessary to conduct its business as currently conducted.
What's Missing?
Just as important as what is included is what is not included. Unlike in a Series A financing, the reps in a seed-stage agreement will generally not include detailed statements about:
A statement confirming the company’s capitalization (i.e., share amounts).
The accuracy of the company's financial statements.
The company's compliance with all applicable laws and regulations.
The company's tax status.
The absence of any pending or threatened litigation.
The understanding among all parties is that the investors are making a high-risk, early-stage bet, and that they will have the opportunity to conduct much deeper diligence on these items during the company's future Series A financing. The light reps & warranties in a seed round are designed to provide the basic assurance needed to get the deal done quickly, not to be a substitute for a full due diligence process.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.