Investors agreement: when should I get them?

Companies often need a cash boost, perhaps to help general growth or to fund a specific goal. One option can be to take out a private or bank loan. However, sometimes it can be beneficial to take an investment, which effectively gives a company money in return for shares in the business. Whenever this happens, an investor agreement should be drawn up.

Why is it Important?

Control over a company by existing shareholders and founders will be diluted whenever new investment is taken in. The implications and restrictions this has on the future activities of a company, the terms on which the investment is made, as well as the ongoing relationship between the investor and the existing shareholders, are all carefully regulated by an investor agreement.

What it is / what should be included?

Investment agreements often begin with a ‘term sheet’ outlining the main provisions agreed between the parties. Once both sides are ready to convert this into a formal investment agreement, set out below are some of the key points to consider. Another important matter to be aware of is the possibility that the offer of shares to an investor may be considered what is known in law as a ‘financial promotion’. These arrangements are subject to complex rules, violation of which may lead to criminal sanctions, so it is vital to take legal advice before proceeding with the investment.
  • What are the names of the investor and the existing shareholders?
  • What is the issued share capital of the company and what type and value of shares do the existing shareholders hold in the company?
  • What number, class and value of shares will the investor get in return for their investment?
  • What is the investment? Whilst this will typically be cash, sometimes the investor instead agrees to contribute their time and expertise by providing a particular services to the company in return for shares (otherwise known as a ‘sweat equity’ arrangement).
  • Is the investment conditional on certain matters? These may be wide ranging and include satisfactory due diligence of the company, or the putting in place of certain insurance levels.
  • Will the investor be granted what are known as ‘veto rights’? This means that certain important company matters (such as payment of dividends or the transfer of existing shares) must be decided by them.
  • What warranties are the company and its directors prepared to give to the investor? Among other things, these usually include assurances that the information provided to the investor about the company is complete, true and accurate in all respects.
  • Will the investment restrict the company from entering into certain future contracts, or raising further funds?
  • Will the investor have the right to appoint directors to the board and will they have open access to the company’s books and accounts?
  • Is the investor entitled to preferential treatment on the sale of the company?
  • Are provisions to be included obliging departing members of the management team to sell their shares at a reduced value, or even surrender them entirely?

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