An English Solicitor & Israeli Lawyer Serving Corporate & Commercial Clients in Both Jurisdictions

Investment Agreements

Investment Agreements

Investment Agreements are typically associatedwith investors providing private companies with finance in return for the issue to the investors of shares in the company. This investment is made in the share capital or equity of the company. The amount of finance becomes part of the company’s capital and the company does not have to return the amount invested to the investor, it is not a loan. However, over recent years, some investments in very early stage companies may actually take the form of a loan that may be converted into shares of the company at a later date and upon the occurrence of certain events, unless the loan is repaid back first. Additionally, there is a relatively new form of investment transaction for early stage companies that is most popular in Silicon Valley from where it originated. This form of investment is called the Simple Agreement for Equity or SAFE for short. The SAFE is similar in form to the convertible loan in that the investor provides his cash investment upfront and it is only converted into shares at a later date, but it is not considered a loan and is not repayable to the investor before being converted into shares. You can read more about the different investment structures for private companies in my blog here.

Investment Agreements, also referred to as Share Subscription Agreements and Share Purchase Agreements, vary in size and complexity depending on the size of the investment, the number of investors, the stage in the Company’s life in which the investment is being made and whole host of other factors that are too numerous to mention here, although I will post blogs on my blog page on the subject from time-to-time. Investment Agreements are normally preceded by a due diligence and disclosure exercise in which the investors will study the company’s legal and financial state of health carefully to make sure that there is nothing hidden within the depths of the company that may affect its value to the investors. Findings in the due diligence process will often have a bearing on whether or not the investors proceed to invest in the company and when they do, the findings will influence various terms and conditions that will be included in the Investment Agreement.

While there are too many issues to cover here, Investment Agreements will typically cover many of the following issues:

  • How much is being invested in the company and at what valuation. That will determine the percentage of the overall number of issued shares in the company that the investor will receive for his investment.
  • What action needs to be taken by the company before the investor becomes legally bound to make the investment.
  • Whether the investment will be made in one payment or over a number of instalments dependent on milestones and if so, how the milestones will be defined.
  • Whether the investor requires certain founders or other key personnel to be tied down to long term commitments to the company.
  • What representations and warranties and related disclosures will be included in the agreement, which effectively provide a picture of the health and value of the company and how will the investor be compensated if any of the statements prove to be inaccurate or incorrect to an extent that damages the value of the company.
  • Whether the investor will have any say in the management of the company and what kind of say. Depending on the size of the investment and the type of investor, an investor may not require any say at all, other than what is provided to ordinary shareholders by law, while another investor may require one or more seats on the board of directors and the right to exercise a veto over certain decisions.
  • What rights will be attached to the shares and whether these rights will be preferred over the rights attached to other shares of the company. More information is provided in connection with shareholder rights here.[Links 11 to page]
  • What action, if any, will the investor require the company to take following the consummation of the investment transaction.

Case Studies

  • I have advised both investors and companies in various different investment rounds. I advised one particular company on its series A, B and C round investments. Following the B round, the company suffered a very serious downturn in fortunes following the 2008 world economic crisis. The company desperately required additional funds, but was forced to raise funds in a down round. In an attempt to avoid triggering anti-dilution protection of the Preferred B Shares, some of the existing shareholders agreed to provide the company funds in the form of a convertible loan agreement. Not long before the loan repayment date, the company found an investor prepared to invest in a preferred C round. The work was complex because following the meltdown in 2008, there were a number of shareholders who were not happy with the way the company had been managed, directors had personal interests in the loan being provided and then in the preferred C round. In addition to the more “usual” issues being negotiated, care and some political manoeuvring were required in order to ensure that the loan and investment transactions could go ahead with all proper shareholder and director approvals and that there was no possibility of any claim being made that any director had acted improperly. The various transactions took quite some time to complete, but they were completed and the company has managed to survive until today despite the difficulties that it went through.
  • I recently advised a start-up company in a first investment round from early stage angel investors. The company is developing a technology related to augmented reality. The work required actually having the company registered and incorporated, entering into a suitable technology assignment agreement with the founder so that the company would be the owner of all intellectual property rights in the technology under development, suitable consulting and non-compete agreements with the founder amongst other items that required suitable treatment prior to the completion of the investment.

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