Warranties and Due Diligence in Dutch VC Transactions

Why VC warranties are different from M&A warranties

Warranties and due diligence play a different role in VC transactions than in classic M&A. In an acquisition, the buyer usually acquires existing shares and negotiates extensive protection against historic risks. In a VC financing, investors provide new capital to support growth.

That difference matters. VC warranties should give investors comfort on core issues such as incorporation, cap table, IP ownership, employees, key contracts, privacy, subsidies and corporate authority. At the same time, founders and the company should not be exposed to a full M&A-style liability regime that does not fit a startup financing.

This article is part of ViottaLaw’s Dutch VC Insights and connects to implementing US-style VC terms in Dutch venture financings, Side Letters in Dutch Venture Financing Rounds and Remedies, Indemnities and Liability Caps in Dutch VC Investment Agreements.

VC due diligence is about investability

VC due diligence is usually not designed to transfer all business risk to the founders or the company. It is designed to determine whether the company is investable.

Professional investors want to know whether the cap table is accurate, whether the company owns or controls its core IP, whether founders and employees are properly contracted, whether there are existing investor rights, whether key contracts are signed, whether privacy or data issues exist and whether subsidies or regulatory obligations may restrict future growth or exit.

For international investors, Dutch due diligence should also confirm that the financing can be implemented through the correct Dutch corporate and notarial steps.

Company warranties

Company warranties are usually given by the company. They cover the legal status of the company and key operational matters.

Typical topics include due incorporation, authority, share capital, cap table, articles of association, absence of conflicting rights, material contracts, IP, employees, data protection, subsidies, financial information, litigation and compliance.

For investors, these warranties create baseline comfort. For the company, the warranties must remain realistic. A startup should not be expected to give the same broad warranties as a mature seller in a private M&A transaction.

The warranty package should therefore reflect the company’s stage, diligence materials, disclosure and actual knowledge.

Founder warranties

Founder warranties are more sensitive. Investors may ask founders to give personal confirmations about matters within their control or knowledge, such as ownership of shares, absence of side arrangements, IP created before incorporation, founder commitments, non-compete obligations or competing activities.

This can be justified, particularly in early-stage rounds where the founders are central to the investment case. But broad personal founder recourse for all company warranties is usually disproportionate.

The drafting should distinguish clearly between company recourse and founder recourse.

IP ownership as a core diligence item

For Dutch technology startups, IP ownership is often the most important due diligence and warranty topic.

Investors want assurance that software, inventions, technology, trademarks, domains, data and technical documentation are owned or properly licensed by the company. Issues often arise where founders created IP before incorporation, freelancers worked without clear assignment language or university, grant or consultancy arrangements affect ownership.

If IP is incomplete, a warranty may not be enough. The issue may need to be fixed before closing through assignments, confirmations or amended contractor agreements.

Disclosure in VC transactions

Disclosure connects due diligence to the warranty package. The company discloses exceptions to the warranties through a disclosure letter, disclosure schedule or data room.

In VC deals, disclosure should be practical. Investors need clear exceptions on core matters, not a heavy M&A-style disclosure process that overwhelms the financing.

Relevant disclosures may include incomplete IP assignments, unsigned contracts, side arrangements, open claims, subsidy conditions, privacy issues, cap table discrepancies or existing investor rights.

Disclosure should not be treated as an afterthought. It determines what risk is accepted, what must be fixed and what remains covered by warranties or indemnities.

Limited recourse

Limited recourse is a key feature of VC investment agreements. Investors need protection, but the investment should not immediately be redirected into warranty claims against the company or founders.

This is why VC investment agreements often include caps, survival periods, thresholds, exclusions and limits on founder liability. Fraud, willful misconduct and intentional misrepresentation are commonly carved out.

The right balance is transaction-specific. Seed rounds, Series A rounds and later-stage growth financings do not require identical warranty and recourse packages.

Practical conclusion

Warranties and due diligence in Dutch VC transactions should support investability and disciplined risk allocation. They should not turn a financing round into a full seller-style M&A liability exercise.

For international investors and counsel, the practical focus should be core legal diligence, clean IP ownership, reliable cap table, appropriate disclosure and proportionate recourse. For founders, the focus should be readiness before the term sheet and careful review of personal warranty exposure.

FAQ

Are VC warranties the same as M&A warranties?

No. VC warranties are usually more focused and should reflect the fact that the transaction is a financing, not a full sale of the business.

Should founders give personal warranties?

Sometimes, but usually only for matters within their knowledge or control. Broad founder liability for all company warranties is often disproportionate.

Why is IP ownership so important in Dutch VC due diligence?

Because investors need comfort that the company owns or controls the technology they are funding.

What is limited recourse?

Limited recourse means that liability for warranty breaches is capped or otherwise restricted, often with exceptions for fraud or intentional misconduct.

How should disclosure work in a VC round?

Disclosure should identify material exceptions to warranties and connect due diligence findings to the investment agreement.

About Dirk de Waard

Dirk de Waard is a Dutch corporate, M&A and venture capital lawyer and partner at Venture Lawyers in Amsterdam. He advises founders, Dutch startups, international investors, VC funds and counsel on due diligence, warranties, investment agreements, disclosure, IP ownership and liability limitations in Dutch VC transactions.

ViottaLaw is Dirk’s personal insights platform. Legal services are provided through Venture Lawyers.

Need Dutch VC warranty or diligence support?

VC warranties should give investors comfort without turning a financing round into a full M&A-style liability exercise.

Dirk de Waard advises founders, investors and international counsel on warranties, due diligence and disclosure in Dutch VC transactions. Contact Dirk at dirk.dewaard@viottalaw.com to review a Dutch investment agreement, warranty package or disclosure schedule.