The most useful page in a seed deal is rarely the term sheet. It's the disclosure letter - the document where the founders quietly write down the things they'd rather not have been asked. The lawsuit from a former contractor. The grant with strings attached. The customer who's threatening to leave. Read it properly and you learn more about the company than the pitch deck told you in ten slides.
Warranties and disclosures are two halves of the same machine. Most first-time angels skim them, assume they're standard boilerplate, and sign. They aren't boilerplate, and the gap between what's warranted and what's disclosed is where the risk you're actually taking lives. Here's how the machine works.
What is a warranty in an early-stage deal?
A warranty is a contractual statement of fact about the company that the founders give you in the investment documents - usually the share subscription agreement or the investment agreement. Each one is a promise: this is true as at the date you invest. If it later turns out to have been false, and you weren't told, you may have a claim for the loss it caused.
Warranties come as a schedule, sometimes a few lines, sometimes many pages. Typical ones cover that the founders own the shares free of any charge, the company is properly incorporated and in good standing, the accounts give a true picture, the company owns or licenses the intellectual property it relies on, there's no undisclosed litigation, material contracts are in force, and the company has paid its taxes and filed what it should. The deeper the round and the larger the cheque, the longer the list a sensible investor asks for.
Their real job is twofold. They allocate risk - if the thing warranted is wrong, that's on the founders, not you. And they flush out information, because to give a warranty safely the founders have to tell you where it isn't true. That second function is where disclosure comes in.
What is a disclosure, and what is the disclosure letter?
A disclosure is the founders telling you, in writing and before you sign, where a warranty isn't accurate. Those carve-outs are collected in a disclosure letter - a document the founders give you alongside the warranties. Anything fairly and specifically disclosed in it is treated as an exception: you've been told, so you can't later sue over it.
So the two documents pull in opposite directions, deliberately. The warranty schedule shifts risk onto the founders. The disclosure letter shifts the disclosed slices back onto you, because you went in with your eyes open. A clean-looking warranty schedule can be hollowed out by a long disclosure letter, and the reverse is also true. You can only judge what you're getting by reading them side by side.
Disclosure letters usually split into two parts: general disclosures (broad references to public records like Companies House, and to the data room you were given) and specific disclosures (named exceptions against named warranties). UK practice generally requires disclosure to be fair - clear enough that a reasonable investor understands the point - rather than a vague gesture at a pile of documents, though founders' lawyers will push the general disclosures as wide as they can. Read the specific ones line by line.
How warranties are limited - caps, time and the floor
A warranty is rarely the open-ended guarantee it looks like. The documents bolt on a set of limitations, and these are as worth reading as the warranties themselves:
- A liability cap. The most a warrantor can be made to pay, usually expressed as a multiple of - or a fraction of - what you invested. Founders argue for a low cap; investors for a higher one.
- Time limits. A deadline for bringing a claim - often around a year or two for general warranties, and longer for tax, which can sit unresolved with HMRC for years.
- A de minimis and a basket. A floor below which a claim can't be brought at all, and sometimes an aggregate threshold the claims have to clear in total before any are payable. This stops a flurry of trivial claims.
- Who gives them. Founders personally, the company, or both. A warranty from a company that's about to spend your money on payroll is worth less than one backed by people.
Be realistic about recovery. At seed stage, founders rarely have the personal resources to pay out a serious warranty claim, and suing the people running the company you've just backed is self-defeating. So the early-stage value of warranties is mostly the disclosure they force out before you commit - not the prospect of a cheque afterwards. They make founders write down what they'd rather you didn't ask about. That's the point.
The tax warranty and your SEIS or EIS relief
If part of why you're investing is the tax relief, one warranty matters more than the rest: the tax warranty. Broadly, it's the founders' promise that the company qualifies for the scheme you're relying on, holds HMRC advance assurance obtained before the round, will issue you the relevant certificate, and won't knowingly do something in the qualifying period that withdraws the relief.
The reliefs are worth protecting. Under the Seed Enterprise Investment Scheme (SEIS), a qualifying investor can claim 50% income tax relief on up to £200,000 invested in a tax year, with the shares held for at least three years. Under the Enterprise Investment Scheme (EIS), it's 30% income tax relief on up to £1,000,000 a year (or £2,000,000 if at least £1m goes into knowledge-intensive companies), again with a three-year minimum hold. Both carry capital gains advantages and loss relief, and both can be carried back to the previous tax year. Lose the relief and you lose a large slice of your downside protection.
Here's the limit of what a warranty does. It gives you a contractual claim against the company if it does something that breaks your relief - it does not make HMRC pay, and it can't conjure relief the company never qualified for in the first place. The certificate still matters: SEIS and EIS work by the company issuing an SEIS3 or EIS3 after your shares are, which you use to claim through Self Assessment, and you generally need to be a UK taxpayer for any of it to be worth having. So the tax warranty sits alongside diligence on the company's qualifying status, not instead of it. The company eligibility tests and the scheme caps are set by HMRC and were revisited for 2026; confirm the current position for a specific deal on HMRC's guidance on gov.uk.
How to read warranties and disclosures in practice
Don't treat them as the paperwork that happens at signing. Treat them as the last and most candid stage of your due diligence. A workable order:
- Read the disclosure letter first, slowly, especially the specific disclosures. That's where the real information is.
- Cross-check each disclosure against the warranty it qualifies. Ask why each carve-out exists, and whether it changes your view of the business.
- Check the tax warranty and advance assurance if you're relying on SEIS or EIS, and confirm who is giving it.
- Read the limitations - cap, time, de minimis - and decide whether what's left is worth anything.
- If something disclosed is material and unresolved, that's a question for the founders before you sign, not a footnote to ignore.
On a syndicated round, the lead angel or fund usually negotiates the warranty package and reviews the disclosure letter on everyone's behalf, and smaller co-investors lean on that work. Worth knowing who did the reading - and, if it matters to you, reading it yourself anyway. For the wider set of documents this sits inside, see our guide to the key clauses in an angel term sheet.
A line on what this article is and isn't: it's general information, not financial or investment advice. Warranties, disclosure letters and the tax rules around them are legal matters, and they change. Before you sign a deal, take advice from an FCA-regulated adviser and a solicitor, and confirm the current tax position with HMRC on gov.uk.
Frequently asked questions
What is the difference between a warranty and a disclosure?
A warranty is a statement of fact the founders give you in the deal documents - that the company owns its code, has paid its taxes, has no undisclosed lawsuits, and so on. A disclosure is the founders telling you, in writing, where that statement isn't quite true. Disclosures sit in a disclosure letter, and anything properly disclosed in it is carved out of the warranty, so the founders can't be sued over it later. Warranties shift risk onto the founders; the disclosure letter shifts the disclosed bits back onto you. You have to read both together.
Do angels usually get warranties in a small seed round?
Often a limited set, and sometimes very few. On a small or fast seed round, founders frequently give only fundamental warranties - that they own the shares, the company is properly incorporated, and the accounts aren't misleading - rather than the long schedule a later-stage investor would demand. A lead angel or syndicate writing the larger cheque tends to negotiate the warranty package and disclosure letter for everyone, and smaller co-investors rely on it. If you're investing on SEIS or EIS terms, the tax warranties are the ones worth insisting on.
What is a tax warranty and why does it matter for SEIS or EIS?
A tax warranty is the founders' promise that the company has met the conditions for the scheme you're relying on - typically that it qualifies for SEIS or EIS, holds HMRC advance assurance, will issue the SEIS3 or EIS3 certificates, and won't knowingly do anything in the relevant period that breaks the relief. It matters because the reliefs are valuable - SEIS gives 50% income tax relief and EIS 30%, on shares held at least three years - and a company action after you invest can withdraw them. The warranty gives you a contractual claim if the company causes that. It does not replace HMRC's own rules. This is general information, not advice.
What happens if a warranty turns out to be untrue?
If a warranty was untrue and the matter wasn't disclosed to you, you may have a claim against whoever gave it - usually the founders - for the loss in value caused. In practice the documents limit that heavily: a financial cap on total claims, a time limit for bringing them, and a small floor below which claims can't be made. At seed stage the practical recovery is often modest, because founders rarely have deep personal resources. The real value of warranties early on is less the payout than the disclosure they force: they make founders write down what they'd rather you didn't ask about.
Should I read the disclosure letter or just the warranties?
Both, and the disclosure letter especially. The warranty schedule tells you what the founders are promising; the disclosure letter tells you everything they've quietly carved out of those promises. A clean-looking set of warranties can be hollowed out by a long disclosure letter, and the genuinely useful information about the business often sits in the disclosures rather than the marketing deck. Read it as part of your due diligence, not as a formality at signing.