Indemnification is a contractual promise by one party to cover another party's losses, legal costs, or damages arising from specific risks, most commonly seen in investment documents, acquisition agreements, and D&O (directors and officers) insurance coverage.
In a financing round, a company typically indemnifies its directors and officers against personal liability for decisions made in good faith on the company's behalf, part of why D&O insurance exists: to actually fund that promise if a claim comes in, rather than leaving the company to cover it out of pocket.
In an acquisition, indemnification provisions determine who's on the hook if a representation made during the deal turns out to be false, an undisclosed liability, an IP ownership issue, and for how long and how much. Some of the most heavily negotiated provisions in a sale agreement, since they directly determine how much risk the seller still carries after the deal closes.
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