Meaning
Legal provisions empower a debtor to reduce their payment obligations by applying outstanding counterclaims against the creditor. Within startup exits, set off rights allow the acquirer to withhold transition payments or milestone payouts to cover indemnity claims. This mechanism reduces the need for the buyer to initiate separate legal actions.
Withholding Protocol
Buyers execute these actions by issuing a formal notice of claim to the seller. The withheld funds are either moved to an escrow account or deducted directly from the next scheduled earnout. This action forces the seller to dispute the claim if they want to recover the full payment.
Founder Risk
Losing access to expected transition cash flow creates immediate financial pressure on the departing leadership. Founders rely on these milestones to fund their subsequent projects or reward early employees. This leverage allows the acquirer to force concessions on other disputed operational issues during the post-merger integration phase, often leaving the former owners with fewer resources to protect their remaining rights under the transaction documents.
Defense Measure
Sellers negotiate limitations that prevent the buyer from exercising these claims without prior arbitration. These protections ensure that payouts continue until a neutral third party verifies the validity of the indemnity claim.
