Legal Definitions - underwrite

To underwrite means to assume financial risk for another party, a project, or a venture, typically in exchange for a fee, premium, or a share of potential future profits. The entity that underwrites, known as the underwriter, evaluates the potential risks and rewards involved, committing capital or a guarantee with the expectation of a positive return, but also bearing the possibility of financial loss.

• Venture Capital Investment

  Imagine a venture capital firm that decides to invest a significant sum of money into a promising new technology startup. The startup has an innovative idea but no established track record or revenue. The venture capital firm is underwriting the startup's financial future by providing the necessary capital to develop its product and grow its operations. They are taking on the substantial risk that the startup might fail and their investment could be lost entirely. However, they do so with the hope of a massive return on investment if the startup succeeds and becomes highly profitable or is acquired by a larger company.

• Event Promotion

  Consider a concert promoter who wants to bring a popular musical artist to perform in a city. The promoter agrees to pay the artist a guaranteed fee, regardless of how many tickets are sold. In this scenario, the promoter is underwriting the financial success of the concert. They are taking on the risk that ticket sales might not be sufficient to cover the artist's fee, venue rental, marketing, and other operational costs, which would result in a financial loss for them. Their motivation is the potential profit if the concert sells out and generates revenue significantly exceeding all expenses.

• Surety Bonds for Construction Projects

  A construction company bids on a large government contract to build a new public facility. To secure the contract, the government requires a performance bond, which guarantees that the project will be completed according to the terms and specifications. A surety company issues this bond to the construction company. The surety company is underwriting the construction company's performance risk. If the construction company defaults on the contract or fails to complete the project as agreed, the surety company is financially obligated to pay the government to cover the costs of completion or damages. The surety company charges the construction company a premium (a fee) for taking on this financial risk.