Liability limitation

Hello startup friends,

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April kicks off with jokes, but your contracts shouldn’t be one of them. It’s the season of harmless pranks, but when something unexpected shows up in your investment docs, it’s not so funny. That’s why now’s a good time to talk about a clause that’s easy to overlook but critical when things go sideways: limitation of liability. It doesn’t get much attention, but if something goes wrong after closing, it’s one of the first things that matters.

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What’s a limitation of liability clause?

When raising investment, you’ll be asked to make representations and warranties, statements about your company’s legal, financial, and operational state. If something turns out to be wrong and causes a loss, investors might ask for compensation.

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A limitation of liability clause puts a cap on how much can be claimed and clarifies who’s responsible. Usually, the company gives the full set of warranties, not the founders. But if you're ever asked to give personal warranties, this clause is what protects your own finances from open-ended risk.

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Why does it matter?

This clause keeps risk under control and makes clear who’s responsible: the company, the founders, or both. Without it, even small issues like a late tax filing or regulatory slip can lead to open-ended claims. A strong clause defines which losses are covered (direct, indirect, or special), sets a fair cap, and includes clear deadlines for raising issues.

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It also brings in de minimis and basket clauses. De minimis filters out tiny claims that aren’t worth chasing, and the basket clause means small problems only count if, together, they reach a certain size. Together, they help you avoid legal disputes over minor issues.

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Dos and don’ts

Here’s how to make liability limitations work for you:

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Dos

• keep liability with the company so it doesn’t fall on you personally
• exclude liability for indirect losses, special or consequential damages
• set a clear cap that’s fair for your stage and deal size

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Don'ts

• separate liability from reps and warranties, they go hand in hand
• leave personal liability open, always set clear limits if founders give warranties
• accept high or unlimited liability for risks you can’t control or cover

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In a nutshell

Limitation of liability clauses don’t get much attention, but they matter when things go wrong after your investment closes. They cap your exposure, support your warranties, and help protect both the company and the founders. They don’t just protect the company. They protect you too.

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Not sure what your liability clause actually covers?  Reach out to our team, we’ll help you review the fine print and make sure you’re protected. And for more startup-smart legal tips, follow us on LinkedIn.

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See you next month!

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