If you are an entrepreneur looking for investment, but every time you reach an investor they throw in a more complex investor agreement or a document similar to that. And now you want someone to sit you through all these agreements to make a better choice.
First of all, Investor is the one who invests but comes in different shapes as personal investors, angel investors, and venture capitalists, and at different times pre-investors, passive investors, and active investors. You need to keep this detail in mind because this is going to come handy while doing the paper work, evaluation, and equity division.
So, what is an investment agreement?
Investment agreement is the one that baptizes and governs the relationship between the company being invested and her investor who has invested money. Agreement is legal. And investor invests money in exchange of equity or debt. Investment agreement contains the terms which are the basis of the investment, warranties given by the company and investor, and the Non disclosure terms.
You need to understand that the transactory relationship you are trying to get into comes with inherent monetary risk divided between you and and your investors depending on the amount of capital invested.
Investment Agreement will help you foresee, calculate and manage the risks, and navigate dodging them.
Investment agreement binds party legally to hold up to their end of deal. Without it parties will find themselves struggling, trying each other to perform as decided at the moment of investment.
What are the types of Investment Agreement?
Not one document can cater all kinds of need of the companies and their parties. So, there are almost 10 Invest agreements for you to pick from.
What are the main clauses without which you cannot do an Investment Agreement?
A. The Identities of the parties:
An agreement is signed by those who represents the parties. So, from both side a representative will be required who will be signing the party. And that will be aka identities of the parties.
B. Tranche:
The term under which money is being released to party from the other party. Tranche is the portion of money that one gets on the fulfillment on one or the other kind of pre decided terms included in the agreement
If there's any chance where one party is another to pay the pre decided, the agreement should have a clause to resolve such an issue. Tranche must be amendable, as the company grows or is burning down. Every conditions must be taken care of in the tranche.
C. Warranties:
At the time of investment seeking, you are going to reveal some facts about company and yourself on whose basis the investors are going to make decision whether to invest or not. If those pieces of information are found to be false, then the investors can ask for damages.
To handle the damage cost, you can put a cap on the damages , beyond which the damage ask cannot go, even if you find yourself in such an condition. Also try to seek including limited liability for the board members and the management to cap the damages.
D. Board Representation:
As per the Memorandum of Associations and the Article of Association, you can give investor position in the board or the power to observe the board meetings or to choose a member of the board. This will install transparency in the whole process of investment during the entire process.
Also be careful while parting with these rights to the investors as it can make the operation slower.
E. Restrictive covenants:
Company has to promise in exchange of the investment that it will abstain itself from doing something, or will perform something to keep the promise. It can be not competing against one particular company or another market.
F. Confidentiality:
To protect sensitive information bared by each entities, this cluse is added in the investment agreement.
G. Exit strategy:
When parties can not see through some difference, it is better to exit instead of going for legal battle, that's why an exit strategy clause is created, so that parties can exit with all profit and no losses.
Do investors do due diligence before investing?
Yes, prior to get any investment, you will have to open your books to them. So, be sure that you have covered all debts, and other outstanding fines.
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