Meaning
Financial arrangement where a portion of the transaction proceeds is held by a third party to satisfy potential claims against the capitalization table of a target company. Cap table escrow protects the buyer from undisclosed liabilities or disputes regarding equity ownership during a merger or acquisition. It stops applying once the indemnity period expires and the funds are released to the selling shareholders.
Release Trigger
Disbursement of the held funds occurs upon the satisfaction of specific temporal or performance milestones defined in the purchase agreement. If no valid claims against the cap table escrow emerge within the agreed eighteen month window, the agent transfers the balance to the beneficiaries.
Indemnity Scope
Protection extends to errors in the calculation of pro rata distributions or missing certificates that would otherwise dilute the acquirer. A cap table escrow functions as a liquid reserve to settle claims from forgotten founders or overlooked option holders. Such claims would otherwise require direct litigation against numerous individual sellers.
This mechanism provides a clear path for the recovery of losses without the need to pursue dozens of minority investors who have already received their payout.
Claim Procedure
Notification of a potential breach starts a formal contest period where the seller representative may dispute the withdrawal. Evidence of a prior share issuance not recorded in the ledger provides the basis for a draw from the cap table escrow account.
