An investment agreement is a contract in which an investor or investors agree to invest in a company by subscribing for shares in it an agreed price per share. Funding rounds can be completed without an investment agreement, but they often feature in funding rounds that are led by professional investors, such as venture capital firms. Here, we will take a closer look at investment agreements from the company’s perspective.
A draft investment agreement will usually be circulated to an investee company as a funding round advances beyond its initial stage. This usually means that the draft should include in detail the matters that were included in summary form in preliminary agreements, often in an offer letter and term sheet or in heads of terms. The investee company should therefore check that the terms and conditions of the investment agreement are not more favourable to the investors than was agreed in principle.
Investment agreements often have two functions, one is to document the terms on which the investment is made and the funding round is completed, and the other is to set out the ongoing rights and responsibilities of the investors and the company.
In relation to the funding round, reviewing any warranties to be given by the company and or its founders as ‘warrantors’ as a condition to funding will be a main area of focus. To limit their potential liabilities under the warranties, the warrantors will prepare a disclosure letter that brings to the investors’ attention any matters that need to be disclosed against the warranties. The warrantors will also see to include imitations on the amount of their potential liabilities for warranty claims and the timeframe in which the investors can make such claims.
In relation to the ongoing relationship between the investors, other shareholders and the company, the second function of the investment agreement is the same as that of a shareholders agreement, so an investment agreement can replace, and function as, a shareholders agreement. Usually, an investment agreement will provide investors with rights to up-to-date information from the company in the form of management accounts, the right to appoint directors an control over key decisions in relation to the business. The management of the investee company will need to adapt the way it operates to meet those requirements.
Investment agreements are complex in themselves and often mark a new phase of the growth of a company as it completes a significant funding round. JPP Law have a strong team of experts across corporate, commercial and financing to advise you from start to finish of an investment agreement. To discuss our services in more detail, please book an introductory call via our online booking system.
