What should the representation and warranties in the note purchase agreement be?

May 10, 2007

Some investors are perfectly willing to purchase notes without receiving particularly extensive representations and warranties from the company. Other investors want the same level of detailed representations and warranties as a typical VC Series A financing. Generally, I think that if there is a bridge loan after a Series A financing, the investors should receive the same level of representations and warranties that the previous Series A investors received. This means that the company probably needs to prepare a detailed schedule of exceptions or disclosure schedule to disclose things required by the representations and warranties. Representations and warranties in seed stage bridge financings generally will be less extensive than in VC Series A financings, which probably reflects the fact that representations and warranties for an early stage company are not necessarily meaningful because there is very little to disclose. In addition, as a practical matter, the recourse for a breach of representations and warranties generally is a claim against the company for damages. Making a claim for damages against an early stage company without any money may be futile.