The indemnification escrow in a tech M&A deal is typically sized at 5-15% of the transaction purchase price, held for 12-24 months post-closing to cover rep and warranty claims. The escrow is released to sellers in one or two tranches — a partial release at a midpoint survival period and the remainder at the end of the full indemnification period — unless claims are pending, in which case disputed amounts are held until resolution.
The escrow amount in technology M&A transactions typically ranges from 5% to 15% of the total deal consideration, held with a third-party escrow agent for a period corresponding to the survival period of the representations and warranties. The escrow serves as the buyer's primary recourse for indemnification claims, and in many transactions represents the seller's maximum exposure for non-fundamental representation breaches. In Gurpreet Bal's experience, the escrow amount is one of the most heavily negotiated deal terms because it directly affects the seller's net proceeds at closing. Sellers push for lower escrow amounts and shorter hold periods, while buyers seek larger escrows with longer holds to protect against undisclosed liabilities.
General rep and warranty survival periods typically run 12 to 24 months from closing. Fundamental representations — covering matters like title to shares, authorization, and corporate existence — survive for the applicable statute of limitations, typically three to six years. Tax representations survive until the expiration of the relevant tax assessment period. IP representations often have custom survival periods of two to three years given the long tail of IP infringement claims.
Representations and warranties survive closing for a specified period during which the buyer can bring indemnification claims. General representations typically survive for 12 to 18 months. Fundamental representations, including those relating to authorization, capitalization, and title to assets, survive for a longer period, often 36 months or the applicable statute of limitations. Tax representations and certain regulatory representations may have their own tailored survival periods. Gurpreet S. Bal advises clients that the survival period must be long enough to allow reasonable discovery of potential breaches while providing the seller with certainty about when its indemnification exposure terminates.
A deductible basket works like an insurance deductible — the buyer absorbs the first dollar amount of losses and the seller is only responsible for losses exceeding that threshold. A tipping (or dollar-one) basket requires losses to exceed the threshold before any claim is payable, but once the threshold is crossed, the seller is liable for all losses from the first dollar. Tipping baskets are significantly more seller-friendly in transactions where claims are likely to exceed the threshold.
An indemnification basket establishes a threshold of aggregate losses that must be exceeded before the buyer can make indemnification claims. A deductible basket functions like an insurance deductible, meaning the buyer recovers only losses exceeding the basket amount. A tipping basket (also called a first-dollar basket) requires the buyer to reach the threshold before claiming, but once the threshold is exceeded, the buyer recovers all losses from the first dollar. In Gurpreet Bal's practice at Foley and Lardner, tipping baskets are more common in mid-market technology transactions, while deductible baskets are more common in larger deals. The basket amount typically ranges from 0.5% to 1% of the total deal consideration.
The general indemnification cap — the maximum amount sellers must pay for rep and warranty breaches — is typically 10-20% of the purchase price. Breaches of fundamental representations are typically subject to a higher cap, often the full purchase price or a defined multiple. Intentional fraud and criminal conduct are almost always carved out from caps entirely, creating unlimited liability for deliberate misconduct.
The indemnification cap limits the seller's maximum liability for rep breaches, typically set at the escrow amount for general representations. Fundamental representation breaches, fraud, and willful misconduct are typically carved out from the cap and subject to a higher limit, often equal to the total purchase price. Special indemnities for known issues identified during diligence are typically uncapped or subject to a separate, higher cap. Gurpreet S. Bal advises sellers to negotiate for the tightest possible cap structure while ensuring that the escrow amount serves as the effective ceiling for general rep exposure, and advises buyers to negotiate appropriate carve-outs for the categories of risk that warrant uncapped exposure.
Gurpreet's advice: negotiate indemnification at the term sheet. Buyers will resist — it feels premature. Sellers can soften that resistance by qualifying key terms as "subject to buyer's diligence." What it does is establish a baseline before the process gets contentious. Without agreed parameters at the term sheet stage, indemnification becomes one of the most disputed parts of the definitive agreement, negotiated under time pressure and with less goodwill than existed at the outset.
Gurpreet S. Bal is a Partner at Foley and Lardner LLP in Silicon Valley, where he advises startups, founders, and investors on mergers and acquisitions, venture financings, IPOs, and cross-border transactions. He has advised on more than 50 M&A transactions with aggregate deal value exceeding $60 billion across AI, semiconductors, fintech, and emerging technology.