What happens if we breach an investment warranty?
By SuLe · Updated 8 May 2026
If a warranty in your investment agreement turns out to be untrue, the investor can bring a contractual claim for damages — typically the amount by which their shares are worth less than if the warranty had been true. Fair disclosure in the disclosure letter defeats claims, and caps and thresholds limit the rest. Fraud, though, is never capped.
Key facts
- A warranty is a contractual statement of fact about the company; if it's untrue, the investor's remedy is damages.
- Damages aim to put the investor where they'd be if the warranty were true — usually the diminution in their shares' value.
- Anything fairly disclosed in the disclosure letter generally can't be claimed on.
- Agreements set de minimis thresholds, baskets, caps (commonly linked to the amount invested) and time limits.
- Fraud is never capped — deliberate dishonesty strips away all the negotiated limits.
What actually is a warranty — and what does breaching one mean?
A warranty is a contractual promise that a specified fact about the company is true — that the accounts are accurate, that there is no undisclosed litigation, that the company owns its IP. Founders (and sometimes the company) give warranties to the investor in the investment agreement.
If a warranted fact turns out to be false, that is a breach of contract. It does not automatically unwind the deal; instead it gives the investor a claim for damages.
The point of warranties is to allocate risk. They flush out problems during diligence and give the investor a financial remedy if something they were promised proves untrue after they have paid.
What can the investor actually claim?
Contractual damages, measured to put them in the position they would have been in had the warranty been true. In practice for a share investment, that usually means the difference between what their shares were worth as warranted and what they are actually worth given the true facts.
This is a money claim, not a right to hand the shares back. The investor has to prove the breach and the loss it caused, which is not always straightforward.
Because loss is measured by diminution in share value, a technical breach that did not actually dent the company's value may support little or no damages — the claim rises and falls on real financial impact.
How does the disclosure letter change things?
Dramatically — it is your main defence. Alongside the warranties, founders deliver a disclosure letter setting out the true position on anything that would otherwise breach a warranty.
Anything fairly disclosed in that letter generally cannot found a warranty claim, because the investor knew the real position and invested anyway. So a known, disclosed customer concentration or lawsuit is carved out of the risk.
This is why disclosure deserves real care, not a last-minute rush. Accurate, specific disclosure is what converts a scary list of warranties into a manageable one — and vague disclosure leaves the gaps a claim can later exploit.
Are there limits on what we'd pay?
Usually several, all negotiated into the agreement. A de minimis threshold ignores trivial claims; a basket means claims only bite once they collectively pass a floor; an overall cap limits total liability, commonly linked to the amount the investor put in; and time limits stop claims being brought years later.
These protections matter as much as the warranties themselves — they are the difference between a bounded, insurable risk and an open-ended one. Negotiate them deliberately.
One carve-out is universal and non-negotiable: fraud is never capped. If a warranty was given dishonestly, the de minimis, basket, cap and time limits fall away, and liability can be unlimited.
| Protection | What it does | Typical shape |
|---|---|---|
| Disclosure letter | Carves out disclosed matters | Fairly disclosed = no claim |
| De minimis | Ignores tiny individual claims | Small per-claim floor |
| Basket | Claims bite only past a total floor | Aggregate threshold |
| Cap | Limits total liability | Commonly linked to amount invested |
| Time limits | Stops stale claims | Fixed window after completion |
| Fraud carve-out | Removes all limits | Never capped |
Worked example
Dev and Ola raise £800,000 for their B2B SaaS from Harbour Capital, warranting that no single customer represents more than 25% of revenue. In fact one client made up 45% — and it churns three months after completion.
Because the concentration was not disclosed in the disclosure letter, Harbour has a warranty claim, measured by how much less the shares are worth given the true customer position. But the agreement caps total warranty liability at the £800,000 invested, with a de minimis and a basket that this claim comfortably clears. Dev and Ola's exposure is bounded by that cap — unless Harbour can show the misstatement was fraudulent, in which case the cap disappears entirely.
Where founders go wrong
Rushing the disclosure letter
— vague or incomplete disclosure is the single biggest cause of avoidable warranty claims.Not negotiating caps and thresholds
— without a cap linked to the amount invested, your exposure can dwarf what you raised.Giving warranties you can't stand behind
— promise only what the company can actually evidence.Assuming any limit covers fraud
— it never does; dishonest disclosure removes every protection you negotiated.
Related questions
What can an investor claim if a warranty was untrue?
Contractual damages that put them in the position they'd have been in had the warranty been true — in practice, the reduction in the value of their shares caused by the untrue statement. It is a claim for money, not a right to unwind the investment. [More: What are warranties in an investment agreement?]
Does the disclosure letter protect us?
Yes, for anything fairly disclosed. A warranty claim generally can't succeed on a matter that was properly disclosed to the investor in the disclosure letter before completion. That's exactly why the disclosure exercise is so important — accurate disclosure is your main shield. [More: What is a disclosure letter?]
Is there a limit on what we'd have to pay?
Usually. Investment agreements commonly include de minimis thresholds, a basket before any claim can be brought, an overall cap (often linked to the amount invested) and time limits for bringing claims. But fraud is never capped — deliberate dishonesty removes these protections.
How do we reduce warranty risk before signing?
Disclose fully and accurately, negotiate sensible caps, thresholds and time limits, and make sure the warranties are ones the company can actually stand behind. Rushed or careless disclosure is where most avoidable warranty claims come from.
Warranty exposure is won or lost in the disclosure letter and the liability caps — the detail founders are most tempted to rush. A SuLe solicitor can run your disclosure properly, negotiate caps and thresholds that fit what you raised, and defend a claim if one lands. Book a free consultation about your situation.
Keep reading: Can an investor back out after signing a term sheet? · A customer won't pay an invoice — what are my legal options? · What are warranties in an investment agreement? · What is a disclosure letter? · What is due diligence — and what will investors ask for?
Primary sources: GOV.UK — Make a court claim for money
