Investment Agreement

⚡tl;dr an investment agreement (ia) is a contract between the investors and the existing shareholders governing the creation of the shares and the related investment ia includes representations and warranties acting as assurances of certain facts and future behaviours of the parties ia often includes a liquidation preference , which gives the investors some preferred shares this will enable the investors to be paid in priority in case of exit book a free call with us what is it? an investment agreement is a contract that regulates the conditions when shares are created originally (i e from nothing) in the course of a capital increase during a financing round what are the key points? undertakings undertakings of existing shareholders increase of share capital the existing shareholders assure that it will issue new (preferred) shares general assembly for the capital increase, an extraordinary general meeting has to be held proxy the ia serves as a proxy for any actions that must be taken to fulfil the transaction envisioned in the ia this notably includes voting in favour of the capital increase undertakings of the investors subscription of the (preferred) shares the investors undertake to subscribe to the shares, which can either be preferred (see liquidation preference below) or not the subscription can be made in cash or via set off (e g , convertible loan) undertakings of the company approval of resolutions the newly composed board has to convene a constitutional meeting and approve several resolutions (i e to grant the signing power to the new directors) closing the effective implementation of the share transfer is regulated to this end, a place and date for the closing are decided, and the closing actions and deliveries (i e , signed employment agreements or resignation letters from each resigning existing director) are listed the closing actions act as a checklist that must be fulfilled before the closing of the transaction representations and warranties representations and warranties are critical components of an ia, providing assurances about certain facts and conditions of the parties involved as such they impact the amount of risks related to the parties representations are statements of fact as they exist at the time the agreement is made, such as the status of assets or compliance with laws warranties , on the other hand, are promises that these facts will remain true for a certain period these clauses protect parties by allowing them to seek remedies if the stated facts are inaccurate or if breaches occur, ensuring trust and reliability in the transaction such remedies usually include an indemnification (in cash or in share) preceded by a period during which the breaching party has the right to cure in practice, representations and warranties are given by the company, the founders, and the investors example for example, in a startup investment agreement, the company may represent that it owns its intellectual property and warrants that it will maintain this ownership through the terms of the agreement if it turns out that the company does not own the intellectual property, the investor can claim a breach of warranty and seek compensation liquidation preference liquidation preference is a key term in venture capital, ensuring investors recover their investment before common shareholders during liquidation events like mergers, acquisitions, or ipos this mechanism protects investors by giving them priority in payouts , which can be crucial for mitigating risks this is organized by giving investors some preferred shares essentially, liquidation preferences function like a waterfall investors with preference get their designated amount first, and only then are the remaining proceeds distributed to other shareholders this mechanism ensures investor protection and prioritizes their returns there are two types of liquidation preferences 1x non participating basic protection where investors get their initial investment back 2x non participating investors receive double their investment this could be 3x, etc 1x participating investors get their preference amount plus a share of the remaining proceeds triggering events in the event of a triggering event, the liquidation preference clause will find application these are listed in the investment documentation and usually include exit majority shareholders sell their shares liquidation company dissolves, and assets are distributed merger/reorganization company undergoes a merger or reorganization ipo company goes public and offers shares on the stock market what about having multiple types of preferred investors? preferred shares can come in different classes, especially in later financing rounds like series b in these cases, new classes of preferred shares might be introduced metaphorically, new preferred pools are therefore introduced below the waterfall this means that investors in these new classes could get their investment back before those in earlier classes, who will then recover their investment before any common shareholders receive their shares this setup is often based on a " last in, first out " principle, meaning the most recent investors have the highest priority how do i get this done? book a free call with us to discuss your financing round