October 23, 2026
In a typical startup acquisition without representations and warranties insurance, about 10% of the price goes into an escrow for 12 to 18 months, a smaller slice is held for the working capital true-up and for the stockholder representative's expenses, and the rest is paid at closing. With insurance, the escrow is usually under 1%. What you finally keep depends on the indemnification terms: how long your representations survive, the basket the buyer must clear before it can claim, the cap on what you can owe, and the short list of claims where the cap doesn't apply.
Key takeaways
A buyer pays most of the price at closing and holds back the rest to cover three things. The indemnity escrow backs the promises you make in the purchase agreement about the company: that the cap table is accurate, taxes were paid, contracts are valid, there is no undisclosed litigation and so on. If a promise turns out to be wrong and the buyer suffers a loss, it recovers from the escrow. The working capital escrow covers the post-closing adjustment, where the buyer compares the company's actual working capital at closing with the agreed target and settles the difference, usually within 60 to 120 days. The expense fund pays the stockholder representative, the person or firm that acts for all the sellers after closing when a claim or a working capital dispute comes up.
An escrow is held by a third-party escrow agent, usually a bank, and released on a schedule. A holdback is money the buyer simply keeps, and it is worse for sellers: you are relying on the buyer's credit, the buyer decides when to pay, and the buyer can set off a disputed claim against it without anyone else in the middle. Ask for a true escrow.
Four terms decide how much of the escrow you get back.
Survival is how long the buyer can bring a claim. General representations commonly survive 12 to 18 months, long enough for one audit cycle. Fundamental representations, such as organization, authority, capitalization and title to shares, usually survive much longer, often to the statute of limitations or a fixed period such as six years. Tax representations usually survive until the tax statute of limitations runs, plus a short tail.
The basket is the threshold of losses the buyer must reach before it can recover anything, typically 0.5% to 1% of the price. A deductible basket means the buyer absorbs that first amount and recovers only the excess. A tipping (or first-dollar) basket means that once losses cross the threshold, the buyer recovers from the first dollar. A deductible basket is the seller-friendly version. Buyers also ask for a per-claim minimum, so small items can't be bundled to reach the basket.
The cap limits what the buyer can recover for breaches of general representations. Without insurance it is often the escrow itself, commonly 10% of the price. Ask for the escrow to be the sole source of recovery for ordinary breaches, so that no seller can be pursued personally for more. Fundamental representations are usually capped at the purchase price, and fraud is uncapped. Watch the fraud definition: it should cover intentional misrepresentation in the agreement itself, not any sloppy statement anyone made during diligence.
Special indemnities cover known problems that came up in diligence, such as a misclassified contractor or an unfiled sales tax return. These sit outside the basket and sometimes outside the cap. If you disclosed the problem on a schedule, the buyer bought it with eyes open, so push back on a special indemnity for anything already disclosed.
Two more clauses change the math. A materiality scrape reads the representations as if the words "material" and "material adverse effect" weren't there, which makes breaches easier to find. Buyers routinely ask for it for calculating losses and sometimes for determining whether a breach occurred; the second is more aggressive. A sandbagging clause says the buyer can claim for a breach it already knew about before closing. Sellers prefer an anti-sandbagging clause, which bars claims for problems the buyer knew about.
Example. A buyer pays $20,000,000 for the company's stock, all cash, with no debt and no unpaid expenses, so the full price goes to the holders. You own 40% of the fully diluted shares, and every class shares in the price on the same terms, so your gross share is $8,000,000. The purchase agreement sets a 10% indemnity escrow of $2,000,000 for 18 months, a $300,000 working capital escrow and a $150,000 expense fund. There is no insurance. The basket is a 1% deductible, $200,000, and the escrow is the sole recourse for general representations.
At closing, $2,450,000 is held back and $17,550,000 is paid out. Your 40% of the holdbacks is $980,000, so you receive $7,020,000 on closing day, not $8,000,000.
Ninety days later, the working capital true-up comes in on target and the $300,000 is released. You receive $120,000.
At month 18, the buyer brings a $500,000 claim for a sales tax problem the representations missed. The first $200,000 falls inside the deductible, so the buyer recovers $300,000 from the escrow and the remaining $1,700,000 is released. You receive $680,000. The stockholder representative spent $50,000 on the claim, so $100,000 of the expense fund comes back and you receive $40,000.
You end up with $7,860,000 of your $8,000,000, with $840,000 of it arriving between three and eighteen months after closing. The $140,000 you gave up is your 40% share of the $300,000 claim and the $50,000 of expenses.
Now run the same deal with representations and warranties insurance. The policy limit is $2,000,000 (10% of the price), the retention is $200,000, the escrow is 0.5% of the price, or $100,000, and the escrow is the sellers' only exposure for ordinary breaches. At closing you receive $7,780,000. The same $500,000 claim is paid $100,000 from the escrow, $100,000 by the buyer as its share of the retention and $300,000 by the insurer. You get back the $120,000 working capital release and $40,000 from the expense fund, and keep $7,940,000. More of the price is in your account on closing day, and your exposure on indemnity claims is capped at your $40,000 share of the escrow.
| Term | Without insurance | With insurance |
|---|---|---|
| Indemnity escrow | $2,000,000 (10%) | $100,000 (0.5%) |
| Your cash at closing | $7,020,000 | $7,780,000 |
| Your worst case on the claim | $800,000 (full escrow) | $40,000 (full escrow) |
| Your final total | $7,860,000 | $7,940,000 |
Both scenarios assume the preferred converts and everyone shares pro rata. When the sale price is close to the preference stack, the waterfall decides who bears the escrow, which is a separate problem; see What If the Sale Price Is Less Than the Preference Stack?
Representations and warranties insurance (often shortened to RWI or R&W insurance) is a policy, usually bought by the buyer, that pays the buyer's losses from breaches of the sellers' representations instead of the sellers paying them. The policy limit is commonly about 10% of the price. The retention, which works like a deductible, is now typically about 0.5% of enterprise value, down from about 1% a few years ago, and often drops after the first year. Sellers sometimes fund part of it through a small escrow, but in most insured deals today the sellers have no indemnity for ordinary breaches. Premiums have come down in recent years and are usually a few percent of the policy limit, paid by the buyer or split.
The practical effects for sellers are large. Market data from SRS Acquiom's 2026 study, covering deals closed in 2025, put the median indemnity escrow at 10% of transaction value without insurance and 0.5% with it. Many insured deals, by some measures most, have no seller indemnity at all for ordinary breaches. The policy excludes known problems, so anything flagged in diligence still needs a special indemnity or a price adjustment, and it excludes fraud by the sellers, so the fraud carve-out stays. Insurance was once reserved for large deals, but it is now available on deals in the tens of millions, and buyers of venture-backed companies use it regularly. If a buyer hasn't proposed it, ask.
The purchase agreement allocates the escrow among all holders in the same proportions as the price, which usually includes option holders who are cashed out. Check that the agreement doesn't make the founders' escrow disproportionate, for example by backing a special indemnity only with founder proceeds, unless you have agreed to that.
After closing, the stockholder representative receives claim notices, negotiates or disputes them, instructs the escrow agent and runs the working capital true-up. Buyers insist on a single point of contact. A founder can take the role, but once you work for the buyer you will be negotiating against your employer, and some venture investors require a professional representative firm as a condition of the deal. The expense fund pays the representative's costs, and anything left is returned. See What Happens Between the LOI and Closing When I Sell My Startup?
Push for insurance where the deal size supports it, and for the lowest escrow that goes with it. Without insurance, aim for an escrow at or below 10% for no more than 12 to 18 months, as the sole recourse for general representations. Ask for a deductible basket, a per-claim minimum and a cap on fundamental representations at the price actually received, not the headline. Keep the fraud definition narrow, resist a materiality scrape for determining breach, and ask for an anti-sandbagging clause. Insist on a true escrow with a bank rather than a holdback, and on a release schedule that returns any money not tied to a pending claim on the release date. Finally, run the funds flow before you sign the LOI so you know your number at closing and your number at release; see How Do I Read an Acquisition LOI?
For more, see Startup Acquisitions: The 3 Types of Deals and How a Sale Works, Startup Due Diligence, How Does an Earnout Work? and Liquidation Preference.
If you're negotiating a purchase agreement, contact us before you agree to the escrow and indemnity terms.
