The buyer is demanding a broad indemnification cap and a massive escrow holdback to cover potential intellectual property disputes on our AI code. How do we limit our exposure and structure the escrow release timeline to match our actual operational risk?

Question

Tyler Smith · Accepted Answer

Buyers often use intellectual property concerns as an excuse to lock up your cash in escrow for years. To limit your exposure, you must negotiate a tiered escrow structure and a narrow indemnification cap. First, separate general representations and warranties from intellectual property reps. Your general indemnity cap should be limited to ten to fifteen percent of the purchase price, with an escrow holdback of no more than ten percent. Second, set a strict survival period. General reps should expire within twelve to eighteen months, which is plenty of time for the buyer to discover any operational issues. For IP-specific reps, agree to a slightly longer timeline but keep the escrow funds capped and segregated. Structure a phased release of the escrow funds. For example, negotiate to have fifty percent of the escrow cash released at the twelve-month mark, with the remaining balance released at eighteen months. Additionally, you should purchase a Representations and Warranties Insurance policy. This shifts the risk of unknown IP claims to an insurance company, allowing you to reduce the escrow holdback to a tiny fraction of the deal value. This keeps your cash where it belongs: in your pocket, rather than sitting in a buyer-controlled escrow account.