The primary purpose of a company's representations and warranties contained in a stock purchase agreement is to create a mechanism to ensure full disclosure about the company's organization, financial condition and business to the investors. Typical representations and warranties include statements regarding the company's organization, good standing and corporate power, authorization of the transaction, capitalization, intellectual property rights, material agreements, and litigation, employment and tax matters.

Representations and warranties are typically made by the company in the stock purchase agreement which is signed by the company and the investors. However, in certain transactions, the founders of the company may also be required to provide representations and warranties. This is by no means commonplace and this practice mostly occurs in early-stage financing transactions which are lead by investors based on the East Coast.

If one or more representation or warranties of the company are incorrect, the investors will technically have the right to recover damages resulting from such breach from the company. However, in practice, either the company will likely have insufficient cash to meet such claims or the company will be using all or some of the funds invested by the plaintiff investors in order to meet the damages claims and the legal expenses incurred in defending such claims. Defending any claim by the investors would likely also divert important resources of the company (including management attention to the business) which would further adversely affect the investor's investment in the company. As a result, in venture capital investment transactions (in contrast to merger and acquisition transactions) representations and warranties primarily act as a means for identifying issues prior to investment rather than as a means for recovering any losses resulting from a misrepresentation by the company.