Investor Agreement

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Investor Agreement

A Brief Introduction About the Investor Agreement

An investor agreement is an investment agreement between investor and company. Whenever a party wishes to invest money in a particular company or a business with the intention of receiving returns on such investment, he must enter into such an agreement to lay down the terms of his investment.

This agreement is also known as an “investor rights agreement” as it seeks to protect the rights and interests of the investor. Through this agreement, the investor subscribes to a certain number of shares of the company and hence acquires ownership rights in the company. This contract is quite similar to a “stock purchase agreement” and a “subscription agreement.” All these agreements detail the method by which an investor invests in the company.

Who Takes the Investor Agreement? – People Involved

This agreement is entered into between the investor who is investing a particular sum of money in a company and the company in which such investment is being made.

Purpose of the Investor Agreement – Why Do You Need It?

The purpose of an investor agreement is to lay down the terms under which the investor agrees to invest in a particular company. It is important that these terms are laid down in writing as it protects the interests of both parties. Once the amount of investment and the manner of investment have been decided by the parties, it is important to create a written agreement. This helps to ensure that both parties have reached a consensus on all the important issues related to the investment and how the same shall be carried out.

When important terms (such as the conditions that must be fulfilled by the company before the investment is made) are stated in writing, it brings about complete transparency about the entire transaction. Thus, a written agreement is essential to complete the investment in an easy manner and without any conflicts between the parties. An oral agreement may lead to conflicts between the parties regarding the terms of the investment. It is important to avoid such disputes or misunderstandings for any successful business.

Contents of the Investor Agreement – Inclusions

The agreement must first mention the names of the parties who are entering into the contract, the date on which such agreement is made, and the intention of the parties behind creating this contract. The amount of investment and the number of shares being subscribed to by the investor must be laid down.

The agreement must then describe in detail how the investment will be structured and how the payment is to be made. Some investments are made in installments or tranches, and this must be specified in the contract itself. In such cases, the tranches are paid at predetermined periods. The dates and amounts of such tranches must be laid down clearly.

There will be a clause named “conditions precedent” that will talk about the conditions that must be fulfilled by the company before the investment is made by the investor. Such conditions may include the passing of necessary resolutions by the company and conducting of due diligence of the company by the investor. If these conditions are not fulfilled, it may lead to the agreement being terminated.

The date for closing of the transaction and the events that will constitute a successful closing must also be listed out in detail. It is only after all these events have been concluded successfully that the transaction will be considered complete. The agreement must also include the representations and warranties by the company and the investor.

There should also be a clause that lists out the rights of the investor. These will include voting rights, electing directors, purchase or sale of company assets, etc.

Apart from the above important clauses, the agreement will also include several boilerplate clauses such as the indemnity clause, the confidentiality clause, etc.

How to Draft the Investor Agreement?

The following are the steps that should be followed while drafting an investor agreement:

  • Both parties must conduct negotiations among themselves to decide the various important aspects of the transactions, such as the amount of investment, how the investment will be structured, the conditions precedent, etc.
  • Once the negotiations have been successfully concluded, and all the essential aspects have been decided, the terms and conditions that the parties have agreed to must be laid down in writing. The reason for such investment also must be stated.
  • After the agreement has been drafted, the parties and their lawyers must review all the clauses of the agreement. Care must be taken to ensure that all details that are essential to the successful completion of the transaction have been included in the agreement.
  • The parties must make sure that their rights have been protected under the contract. This includes checking whether adequate remedies have been provided for a breach of the terms of the agreement by either party.
  • Once the agreement has been reviewed and the parties are satisfied with its contents, they must sign the agreement. This will make the agreement valid and legally binding.

Negotiation Strategy

  • The negotiation process in an investment transaction mainly revolves around how the investment is to be structured. The investor will seek to protect his investment, and the company will wish to ensure that the payment is made smoothly. The investor may negotiate that the investment amount will be paid in installments when the company reaches certain specified goals.
  • The parties will also negotiate on the condition’s precedent to the investment. The investor must negotiate in such a manner as to confirm that all the affairs of the company are in order, and all the rules are complied with before the investment is made.

Benefits and Drawbacks of the Investor Agreement

The following are the benefits and drawbacks of having an investor agreement:

  • This contract lays down how the investment is structured, and this helps to serve as evidence of the terms of the investment. Any third party who wishes to understand the investment of the investor can go through the agreement and determine the same.
  • A written agreement also makes sure that the parties perform the obligations that are required of them. A timeline is mentioned for the various stages of the investment, and this helps to carry out the transaction in a seamless manner.
  • This agreement will also have a dispute resolution mechanism in place that seeks to resolve all disputes in an amicable and mutually satisfactory manner.
  • In the absence of such an agreement, there is no proof that the investment has been made by the investor or that the company has followed all the requisite rules before the investment. Hence it is in the best interests of all the parties involved to have a well-drafted agreement that covers all the important details.

What Happens in Case of Violation?

The “term and termination” clause in the agreement talks about the remedies that will be available if any party to the contract breaches any term or obligation under it. If the breach is such that it can be cured, the breaching party usually gets thirty days to remedy such breach. These thirty days begin when the breaching party receives notice of such breach from the non-breaching party. If such breach is not cured within this time, the non-breaching party has the option of terminating the contract.

Many investors contracts include a mandatory arbitration clause. This clause states that if any dispute arises between the parties, it shall be resolved through arbitration(1). The clause must mention where the arbitration proceedings shall be held and the language in which it shall be conducted. It must also mention the number of arbitrators who shall constitute the arbitration panel. The arbitrator/s shall be mutually appointed by the parties. Parties prefer arbitration as a means of dispute resolution as it saves the time of the parties and in certain cases, also turns out to be cost-effective.

In conclusion, an investor agreement is a significant contract whenever any investment is made in a company. The agreement is needed to guarantee that the investment has been made after the parties have complied with all the rules and regulations and that the entire process has been carried out lawfully. This agreement evidences the conditions under which the investment has been made. It is essential that the agreement takes into account all possible situations and outcomes and makes suitable provisions for them.