What is Indemnification?
The seller's promise to compensate the buyer for losses if the deal's representations turn out to be wrong.
Indemnification is the risk-allocation engine of an acquisition agreement. Sellers make detailed representations and warranties (the cap table is accurate, the IP is owned, taxes are paid, there's no undisclosed litigation), and indemnification is the mechanism that pays the buyer if any of those prove false. It's governed by a survival period (how long claims can be brought), a cap (the maximum exposure, often the escrow), and a basket or deductible (a minimum threshold before claims count). Why it matters to you: indemnification is where a clean exit can turn into clawed-back proceeds. Negotiate caps, survival, and 'sole remedy' language so your downside is bounded - ideally limited to the escrow and not your full payout.
Example
- Reps survive 18 months, indemnity is capped at the $5M escrow, and a $250K basket means small claims are absorbed before the buyer can recover.