In the context of a venture capital transaction, a “basket” typically refers to a portion of the total consideration paid by the investor that is set aside for indemnification claims.
Indemnification is a common provision in venture capital agreements that requires one party to compensate the other party for certain losses or liabilities that arise in connection with the transaction. A basket allows the investor to aggregate small indemnification claims before pursuing reimbursement from the other party, rather than making individual claims for each small loss or liability.
For example, if a basket of $100,000 is established in an investment agreement, the investor may be required to pay for any indemnification claims out of its own funds until the basket amount is exhausted. Once the basket is exhausted, the investor can then seek reimbursement for any additional indemnification claims from the other party.
The use of a basket can help to reduce the administrative burden of handling many small indemnification claims, and can also help to align the incentives of the parties involved by ensuring that both parties have some skin in the game when it comes to indemnification.