Securing Investors and Structuring the Deal 337when the company has future liability based on some prior event or action. For example, when
a firm produces a product, it has contingent liability if the product is ultimately dangerous, mis-
labeled, or harmful—even if the company had no reason to expect such a problem at the time of
production. Because of the changing nature of U.S. environmental laws, contingent liability
often resides in past decisions concerning waste management, disposal of hazardous materials, or
use of building materials that prove dangerous or poisonous.
The entrepreneur should attempt to negotiate a cushion to protect the founders and the new
venture in case of an omission during the disclosure process. For example, if an omission is hon-
estly made and results in company costs under a certain dollar amount, entrepreneurs will not be
considered in breach of disclosure representations. This is also known as a “hold harmless” clause.
The representations that the entrepreneurs make should be time-limited.
APPENDIX NOTES
- See H. Hoffman and J. Blakey for additional details. “You Can Negotiate with Venture Capitalists,” Harvard Business Review, March-
April, 1987. - S. Kaplan and P. Strmberg, “Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital
Contracts,” The Review of Economic Studies70, no. 2, April 2003: 281-315.