Process & paperwork
Disclosure letter
A document delivered alongside the investment agreement in which the company sets out the exceptions to its warranties — everything that would otherwise make a warranty untrue.
In plain English
The warranties say the company has no undisclosed litigation. The disclosure letter says: except for the dispute with a former contractor, described here. Once fairly disclosed, a matter cannot be the subject of a warranty claim — the investor has been told and has proceeded anyway.
It has two parts. General disclosure covers categories of information deemed disclosed to everyone: public filings, the data room, correspondence between the lawyers. Specific disclosure covers particular matters against particular warranties, described individually.
The standard of disclosure is what makes it work or fail. Fair disclosure means enough detail for the investor to understand the nature and scope of the matter. A disclosure letter that says "see the data room" against every warranty is not fair disclosure, and a serious investor will refuse it — though the argument is more often had in acquisitions than in seed rounds.
For an investor it is the most informative document in the entire package. The warranties are boilerplate; the disclosure letter is the company's own account of everything that is not quite standard about it, written by people who know it is legally consequential.
What it means for your cheque
Read it. It takes twenty minutes and it is the closest thing to a candid list of the company's problems that you will ever be handed. Where you are not sent one — common for small cheques in rounds led by someone else — ask the lead whether anything material was disclosed.
What you are looking for is not the presence of disclosures, which is normal, but their character: unresolved IP ownership, a customer concentration or termination right that was not mentioned in the pitch, employment claims, or anything that contradicts what you were told in a meeting.
Do the arithmetic
How to read a disclosure letter in twenty minutes
The disclosures that matter, and what each one should prompt you to ask.
| IP assignments incomplete or missing | Ask what proportion of the codebase is affected and when it will be fixed |
|---|---|
| Customer contract with a change-of-control termination right | Ask what share of revenue that customer represents |
| Contractors treated as self-employed | Ask whether the exposure has been quantified |
| Undocumented equity promises | Ask for the total and whether it is in the cap table you were shown |
| Regulatory approvals pending | Ask what happens to the plan if they are refused |
| A dispute with a former founder or employee | Ask for the full history — this is the one that most often matters |
A disclosure letter with nothing in it usually means the exercise was not done properly. Genuine, specific disclosures are a sign of a company being run by people who understand what they are signing.
At the table
What to negotiate
- Insist that general disclosure by reference to a data room is not sufficient for material matters.
- Require specific disclosures to be cross-referenced to the warranty they qualify.
- Ask for the letter to be delivered a reasonable time before closing, not on the day.
- As a non-lead investor, ask the lead directly whether anything material was disclosed.
- Where a disclosure reveals a fixable problem, make fixing it a condition of closing rather than a matter for later.
Around the world
How this differs by market
Disclosure letter: common questions
What does fair disclosure mean?
Should I be worried by a long disclosure letter?
Do angels get to see the disclosure letter?
Keep reading