Indemnification is a legal obligation where one party agrees to compensate another for losses, damages, or legal expenses arising from specified events or breaches.

How it works

In acquisition agreements, sellers indemnify buyers for breaches of representations — undisclosed tax liabilities, IP disputes, or employment claims discovered post-close. Indemnification may be capped at a percentage of purchase price and subject to baskets and survival periods. Venture financing documents sometimes include mutual indemnification for securities law compliance. Corporate bylaws typically indemnify directors and officers for actions taken in good faith, supplemented by D&O insurance. Founders personally indemnifying investors is rare in standard VC rounds but appears in fraud or gross negligence scenarios. Holdbacks and escrow fund indemnification claims in M&A before touching seller payouts.

Why it matters

• Founders: Negotiate caps, baskets, and survival periods on sale indemnities. Personal liability beyond your proceeds is a red flag requiring legal review.
• Investors: Indemnification structure protects against unknown liabilities in buyouts; reps and warranties insurance can shift risk off sellers.

Common mistake

Assuming indemnification is unlimited and perpetual. Most deals cap exposure and expire claims after 12–24 months except for fundamental reps.

Related ideas

Holdback, reps and warranties, D&O insurance, and escrow arrangements implement indemnification economically.