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"Weinstein Clauses" in Startup Transactions

To secure capital, an acquisition or partnerships, startups may now need to guarantee that there have been no allegations of sexual misconduct by management.

Since the #MeToo movement, parties that transact with startups want more legal protection from past behaviors that may impact the company's financials down the road.

Corporate transactional documents contain representations and warranties (known as the "reps & warranties"), wherein each of the parties to the transaction represent certain facts and guarantee that such facts are accurate.

If a representation made by one party turns out to be false because of inaccurate or omitted information, then the party that suffered harm due to its reliance on such false information may be able bring a breach of contract claim against the misrepresenting party to recover all or a portion of any damages incurred.

New "Weinstein" Clause

Now, parties entering into large transactions with startups are asking for a novel representation—one regarding the behavior of the company's management, particularly, that none have been implicated in any sexual misconduct allegations, whether or not proven (in court, arbitration, or otherwise) or as part of a private settlement agreement. This representation, referred to as a "Weinstein Clause," or the "#MeToo rep," usuallly covers senior employees or executives who oversee a large number of employees.

If a startup lies or omits such information, and the company is later negatively impacted from a sexual misconduct allegation or settlement, then the sellers of the company may be obligated to pay for any damages incurred by the buyers (including a devaluation of the company) based on a breach of the contract.

The Statistics

While the #MeToo movement actually began more than a decade ago, it gained greater visibility and traction in October of 2017 when Hollywood celebrities began speaking out about movie mogul, Harvey Weinstein, over social media using the viral "MeToo" hashtag. Since then, at least 425 prominent individuals across numerous industries have been publicly accused of some form of sexual misconduct. These allegations have caused hundreds of firings and resignations.

It started to become a tsunami, certainly after Weinstein, and it sparked other stories in the same industry and then across all industries.

(Davia Temin, reputation and crisis management).

The Economic Impact

Public managerial indiscretions can adversely affect a company's reputation with consumers and employees and decrease trust in its integrity, value and operations. Companies of accused executives experience significant wealth deterioration, reduced operating margins, and lost business partners. Indiscretions are also associated with an increased probability of unrelated shareholder-initiated lawsuits and DOJ and SEC investigations.

Allegations of sexual misconduct in the workplace can also greatly impact business strategy and potentially derail partnerships, an acquisition, or private or public fundraising efforts.

In 2017, Uber CEO and founder, Travis Kalanick, resigned after allegations of a toxic workplace culture with rampant sexual harassment. Public scrutiny likely caused Uber to delay its IPO in 2018, forcing the company to wait until 2019 when market conditions were less favorable. Past allegations may have adversely affected Uber's public market valuation. Investors are wary of financial impacts from past claims (many of which Uber quietly settled pre-IPO), as well as what the claims reveal about the company's management and employees.

Some investors would be squeamish about unresolved allegations of misconduct to the extent that characterizes how the company behaves. . . Valuation in the marketplace also reflects the intangibles.

(Harry Turtle, finance professor, Bloomberg).

Just months after the sexual misconduct allegations against Weinstein became public, The Weinstein Company (T.W.C.) filed for bankruptcy. T.W.C. also nullified its non-disclosure agreements that silenced many from speaking out against Weinstein. Four months later, T.W.C was purchased by a private equity firm with all proceeds going to pay off lawyers and bankruptcy officials. Weinstein and his co-founder received nothing in the deal.

Like T.W.C, many companies used NDAs to prevent employees who've agreed to a private settlement from discussing their experiences. However, as of January 1, 2019, California companies may no longer include provisions in settlement agreements that prohibit accusers from disclosing factual information pertaining to claims of sexual misconduct.

Weinstein Clauses & Startups

Because of the adverse financial impacts of managerial sexual misconduct claims, more parties in the startup universe are asking for guarantees that no such allegations currently exist and for protections for failures to disclose any such claims.

At least seven big deals in 2018 involving public companies in entertainment, real estate, and hospitality, have included such reps. Several deals also required representation that top-level employees have not been involved in any sexual misconduct claims in the past five years.

Another new trend in M&A transactions includes includes a clawback provision, whereby a certain sum of money paid for the startup is returned to the buyer if undisclosed allegations cause the company damages.

In other cases, startup buyers are requiring the company to hold as much as 10% of the total value of the transaction in escrow which the acquirer can later claim if an undisclosed allegation comes to light after the deal.

Startups Face Increased Social Due Diligence

For bigger investment transactions, social misconduct is becoming a larger part of the due diligence process. Some investors are requiring companies to implement additional sexual harassment training, hire outside workplace experts, increase gender diversity, and add independent directors. Some are also asking businesses to increase their insurance to combat any financial fallout from social issues.

As investing in early-stage companies . . . may be risky, conducting a due diligence investigation may identify smoking guns at an early stage, enabling the investor to either mitigate the risks at hand, renegotiate the deal on the table or in the worst case, blow up the deal.


Private equity firms have been conducting due diligence beyond just financials. These firms are becoming more interested in human resource and labor issues.

More of the right questions are being asked around culture and behavior. Buyers are focusing more on patterns of behavior and whether a company can be integrated based on nothing to do with math or multiples or any of that. That's a fundamental shift.

(John Waldron, Co-head of investment banking at Goldman Sachs).

Intentional Startup Culture

In light of the social shifts taking place, founders should be hyper aware that a startup's culture can greatly affect its value and even kill potential deals.

Today, it is not enough for entrepreneurs to create products or services that the market desires. Founders must also become leaders who proactively foster a workplace culture where insiders (employees) are respected, and where outsiders (clients/customers, contractors, partners, investors, purchasers) want to transact.


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Disclaimer: The information on this website is meant to be used for general educational purposes only. This information may not reflect the current law in your jurisdiction and should not be construed as legal or business advice or an advertisement for legal services. You should not act or refrain from acting on the basis of any information in this post or accessible through this website. If you have questions regarding your particular facts and circumstances, seek counsel from an experienced startup lawyer.



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