I'm surprised this isn't more discussed in the comments. It's a major element to consider when you're selling your business. He correctly identified it after all, as a potential deal breaker.
You're selling something, so in an acquisition you will have to represent and warranty what you actually own and you're selling. This sounds simple on its face, but technology isn't nearly so well-defined and legally sorted as, for example real estate.
In software, even if you are 100% certain you can transfer all of the code and there are no potential content copyright issues or latent prior agreements by yourself or other sellers, current/former employees who think they own something, etc, you still have at a minimum, a hard-to-quantify "Sword of Damocles" in the form of thousands of potential patent claims hanging over you, trolls or not, it doesn't matter in a sale. As in business itself, the bigger the money involved, the more visible you become to potential claims.
A publicly-traded buyer is likely to be less flexible on terms, but in any case you as a seller have also to consider that in a sale, you're most likely going to be forced to shift liability from your corporation to yourself personally. If you're prudent, as this seller was, you realize this creates a time period increased personal risk, despite your increased assets. Keeping this period as short as possible and limiting its scope and magnitude is your objective.
A few limitations I can vouch for making it past public company scrutinity are 1. any dispute costing less than $X are not your responsibility. 2. a maximum liability limitation equal to the purchase price in cash / shares (in case share prices drops) 3. a time limit of two years or less. 4. escrow of a portion of the purchase consideration (shares and/or cash) as a warranty cap for the duration of the warranty, perhaps with release/reduction over time. The tax treatment of this arrangement would have to be considered carefully.
Finally, it's worth noting that insurance for an acquisition deal may be available from big name insurers, likely for some low single-digit percentage of the deal value. However, their legal department will undoubtedly be more sophisticated in this area than your counsel, so at its worst insurance gives you little more than a contract with an insurance company over which to sue, likely at great cost.
Overall, as lawyers always say, "it depends." Unless the deal and/or your resources are immense, likely it is a problem with no risk-free solution. If you're young and have nothing to lose, risk is an easier choice. For everyone else, all you can do is optimize based on present knowledge.
So assuming you get a short time limit of <2yrs, would it be smart to stick it in a low risk account somewhere and not touch it until that term is up? Or was that the intent of the escrow?
I'll suggest that the escrow route is an alternative to agreeing to indemnification in a simpler form; I can't imagine a situation where having both would be of benefit to the seller at least.
I think ideally escrow would nicely encapsulate risk for a seller and ramp it down over time. When applied to cash it could create tax issues if a payment is recognized as income in one tax year and only becomes available in a subsequent year. For shares received by exchange for existing shares structured as a merger, this is likely solvable. If a selling party holds only stock options though and is issued shares on closing, again, my initial guess would be that would be deemed a "taxable event." Another aspect of escrow is that it eventually requires sign-off from the buyer to release it to you, effectively giving them control of your proceeds that they might attempt to exercise outside of the original intent of the escrow.
So, as for handling your windfall during the indemnification period, yes, purely the simplest approach would be to hold the proceeds in the most risk-free way until your indemnification period ends.
This is however, again complicated at least by tax implications if you need some of the money to pay taxes due on cash received in the closing.
Furthermore, there is a strong argument for using some cash to hedge against a decline in the value of shares received (if any), simplistically illustrated by purchasing put options on the acquiring company's stock, since you're forced to hold it throughout some inevitable lockup period. Put options on a reasonably closely-correlated financial instrument might also be viable if the acquiring company isn't so large as to have an active options market, since public stock prices seem to move broadly, barring any company-specific failures.
To put some entirely fictional numbers to the hedging argument, imagine you're obligated to sit on $10M worth of public stock for two years and you could spend $250K cash today to gain a significant level of protection against a drop in the share price. After your two-year wait, you either have $10M or more in stock if the price held or rose ($250K is gone but you spent it on insurance of a sort) or perhaps the stock dropped 80% and you now have $2M in stock but another $4M made back from the put options you bought, so while $6M pre-tax isn't $10M, it's a lot more than $2M.
You're selling something, so in an acquisition you will have to represent and warranty what you actually own and you're selling. This sounds simple on its face, but technology isn't nearly so well-defined and legally sorted as, for example real estate.
In software, even if you are 100% certain you can transfer all of the code and there are no potential content copyright issues or latent prior agreements by yourself or other sellers, current/former employees who think they own something, etc, you still have at a minimum, a hard-to-quantify "Sword of Damocles" in the form of thousands of potential patent claims hanging over you, trolls or not, it doesn't matter in a sale. As in business itself, the bigger the money involved, the more visible you become to potential claims.
A publicly-traded buyer is likely to be less flexible on terms, but in any case you as a seller have also to consider that in a sale, you're most likely going to be forced to shift liability from your corporation to yourself personally. If you're prudent, as this seller was, you realize this creates a time period increased personal risk, despite your increased assets. Keeping this period as short as possible and limiting its scope and magnitude is your objective.
A few limitations I can vouch for making it past public company scrutinity are 1. any dispute costing less than $X are not your responsibility. 2. a maximum liability limitation equal to the purchase price in cash / shares (in case share prices drops) 3. a time limit of two years or less. 4. escrow of a portion of the purchase consideration (shares and/or cash) as a warranty cap for the duration of the warranty, perhaps with release/reduction over time. The tax treatment of this arrangement would have to be considered carefully.
Finally, it's worth noting that insurance for an acquisition deal may be available from big name insurers, likely for some low single-digit percentage of the deal value. However, their legal department will undoubtedly be more sophisticated in this area than your counsel, so at its worst insurance gives you little more than a contract with an insurance company over which to sue, likely at great cost.
Overall, as lawyers always say, "it depends." Unless the deal and/or your resources are immense, likely it is a problem with no risk-free solution. If you're young and have nothing to lose, risk is an easier choice. For everyone else, all you can do is optimize based on present knowledge.