What Are the Key Terms in an M&A Agreement for Tech Companies?

In the world of software and technology M&A, the devil is in the details. While headlines often focus on valuation multiples or strategic synergies, the real substance of a deal lies in the definitive agreement — the legal contract that governs the transaction. For founders, CEOs, and investors navigating a tech exit, understanding the key terms in an M&A agreement is not just a legal exercise — it’s a strategic imperative.

This article outlines the most critical terms in a tech M&A agreement, with a focus on how they impact value realization, risk allocation, and post-closing outcomes. Whether you’re selling a SaaS platform, a cybersecurity firm, or a niche AI tool, these terms will shape your deal’s success.

1. Purchase Price and Consideration Structure

At the heart of any M&A agreement is the purchase price — but how that price is paid matters just as much as the number itself. In tech deals, consideration often includes a mix of:

• Cash at closing – The most straightforward and preferred form of payment.
• Equity rollover – Common in private equity transactions, where founders retain a stake in the new entity.
• Earn-outs – Contingent payments based on future performance, often used to bridge valuation gaps.
• Escrow holdbacks – A portion of the purchase price held in escrow to cover post-closing indemnities.

Each of these components carries different tax, risk, and liquidity implications. As we’ve discussed in How Do I Handle Earn-Outs in the Sale of My Software Business, earn-outs can be particularly tricky — aligning incentives while avoiding disputes requires careful structuring and clear metrics.

2. Representations and Warranties

Reps and warranties are the seller’s assertions about the business — from financial statements and IP ownership to compliance and customer contracts. In tech M&A, these often include:

• Intellectual property ownership – Confirming that all code, patents, and trademarks are properly assigned and free of encumbrances.
• Data privacy and security compliance – Especially critical for SaaS and AI companies handling user data.
• Open-source software usage – Misuse or improper licensing can derail a deal late in diligence.

Buyers rely on these reps to assess risk. If any turn out to be false post-closing, the seller may be liable for damages. That’s why firms like iMerge often recommend conducting a pre-LOI diligence review to identify and address potential red flags early.

3. Indemnification Provisions

Indemnification clauses allocate post-closing risk. If a buyer suffers losses due to a breach of reps and warranties, they may seek compensation from the seller. Key terms include:

• Cap – The maximum amount the seller can be liable for (often a percentage of the purchase price).
• Basket – A threshold of losses that must be met before indemnification kicks in.
• Survival period – How long the reps and warranties remain enforceable post-closing.

In tech deals, IP and data security breaches often carry longer survival periods or even “fundamental” status, meaning they’re not subject to caps or baskets. Sellers should negotiate these terms carefully, especially when dealing with strategic acquirers or international buyers.

4. Working Capital Adjustments

Most M&A agreements include a working capital adjustment to ensure the business is delivered with a normalized level of short-term assets and liabilities. This is particularly important in SaaS businesses with deferred revenue or annual billing cycles.

Misunderstanding how deferred revenue is treated can lead to post-closing disputes. As we noted in How Do I Present Deferred Revenue During an M&A Process, clarity around revenue recognition and contract liabilities is essential for both parties.

5. Covenants and Closing Conditions

Between signing and closing, both parties agree to certain covenants — promises about how the business will be operated. These may include:

• Conduct of business – Restrictions on hiring, spending, or entering new contracts.
• Non-solicitation and non-compete clauses – Preventing the seller from poaching employees or launching a competing venture.
• Regulatory approvals – Especially relevant in cross-border deals or those involving sensitive technologies.

Failure to meet closing conditions — such as obtaining third-party consents or clearing antitrust hurdles — can delay or derail a deal. This is why experienced advisors like iMerge help clients anticipate and navigate these issues early in the process.

6. Employee and Founder Retention

In tech M&A, talent is often as valuable as the product. Buyers may require key employees or founders to sign new employment agreements, equity incentive plans, or retention bonuses. These terms are typically negotiated in parallel with the main agreement and can materially affect the deal’s success.

Founders should also consider how these terms align with their personal goals. Are you staying on for a transition period? Rolling equity into a new entity? These decisions have both financial and lifestyle implications.

7. Dispute Resolution and Governing Law

While often overlooked, the choice of governing law and dispute resolution mechanism can have real consequences. Arbitration vs. litigation, jurisdiction, and venue — these terms determine how conflicts are resolved if things go sideways.

For cross-border deals, this becomes even more complex. As we explored in Regulatory Hurdles in Cross-Border M&A for Tech Companies, aligning legal frameworks and enforcement mechanisms is critical to protecting both parties.

Conclusion

Understanding the key terms in an M&A agreement is more than a legal checklist — it’s a roadmap for value preservation, risk mitigation, and post-deal success. For tech founders, these terms can shape everything from your final payout to your future role in the business.

Firms like iMerge specialize in helping software and technology companies navigate these complexities — from exit planning strategy to final negotiations. With the right guidance, you can approach the deal table with clarity, confidence, and leverage.

Use this insight in your next board discussion or strategic planning session. When you’re ready, iMerge is available for private, advisor-level conversations.