An investment agreement is a contract which lays down the terms and conditions governing an investment into a company. Typically, when an investor infuses money in a company, he wants higher returns on the same. He can get such returns by being granted equity shares in lieu of his investment
An Investment agreement is entered into between a invester and the company. This is done when a company requires funding and an investor is willing to provide such type of funds.
Typically, investors are granted equity shares or other such rights. The investment agreement will have the terms and conditions governing such a relationship between the parties.
Purpose of Investment Agreement:
An Investment agreement is entered to document all the necessary terms and conditions of the investment arrangement. It gives opportunities to companies in need of funds and raise them without any hassle.
Key terms in the Contract:
1. Number of Shares and nature of Shareholding: An investment contract should contain the details of number of shares being allotted to the investor
2. Representations: Representations to the effect that shares are unencumbered, the promoter of the company holds the right to transfer the same and that the allotment of shares is occurring in compliance with laws need to be made.
3. Price: The price for which the shares are allotted will be needed to be included in the agreement.
4. Conditions precedent: Any conditions which are to be followed by the promoter or the investor prior to the vesting of obligations are needed to be mentioned in the contract.
5. Closing: This clause contains the date and venue when the closing of the transaction takes place and will be dependent on the conditions precedent being fulfilled.
Types of Investment Agreements:
1. Equity purchase agreement: In Equity purchase agreement, equity shares are allotted in lieu of investment.
2. Convertible Debt Agreement: A convertible debt is also mentioned as equity, however, the option to convert is with only allowed to allottee. It needs to be converted within a stipulated period of time.
3. It helps the promoter of a company in need of finance to avail of the same in lieu of its shares, hence makes financing easy.
Pros of an Investment agreement:
1. Regular payments are not required for financing.
2. It is very beneficial for the investor as there is more opportunity to earn a lot more than general traditional investments you do.
Drafting Guide lines:
1. The percentage of shareholding and number of shares details should be calculated properly.
2. Amount being invested or the consideration in lieu of shares should be included.
3. Compliance with applicable laws needs to be included.
4. Price of shares should be arrived at by following the applicable law.
5. Total equity share capital of the company has to be mentioned.
6. Details like distribution of profits/losses and which right is conferred on the investor and how it has to be exercised needs to be included in the agreement.
7. Tax implications if any should be mentioned in the contract.
8. Recitals stating the purpose behind the investment has to be mentioned.
An investment contract is a commonly used document used to capture the terms and conditions governing the relationship between the promoters of a company and the investor. Disputes as to ownership and control, returns on equity etc. may arise. Typically, mediation and arbitration should be preferred over litigation as a method of dispute resolution.
Cons of An Investment Agreement
An investment agreement has the following cons:
- Promoters also have to deal with undue and unnecessary interference by investors.
- Finding the right investor is time-taking and may cause the business to suffer.
- Risk for the investor is higher, as the prices of equity shares are dependent on a number of factors, not all within the control of the promoters.
- The promoters in their bid to get finance also end up losing control over their company. Sometimes, the investors demand for a majority stake and the promoters remain as mere puppets in their hands.