What is a sample investment contract? When trying to raise funds for your business, you will have to prepare a variety of different legal documents in order to support the process and make sure the process runs smoothly. During the period in which you are raising money, one of the most important documents you will enter into is an investment contract.
A contract for investment is an agreement between the investor and the company in which the investment is being made. The major contractual terms and conditions that must be satisfied for the investor in order for them to invest in your business, will be outlined in the investment contract.
Following an introduction to what an investment contract is, this article will go on to describe some of the essential elements that should be included in a good investment contract.
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Here is the content that we will cover in this post. Let’s get started.
- 1. What is an Investment Contract?
- 2. Why is an Investment Contract Important?
- 3. What an Investment Contract Should Include
- 4. Warranties
- 5. Investor Rights
- 6. Participation Rights
- 7. Boilerplate Clauses
- 8. Basic Clauses
- 9. Confidentiality
- 10. Covenants Not to Compete
- 11. Financial Information
- 12. Board Representation
- 13. Adherence
- 14. Tranches
- 15. Investment Contract Vs. Shareholders Contract
- 16. Conclusion
What is an Investment Contract?
During the process of fundraising, an investor will provide the business with cash capital in return for shares of the company, or in the form of a loan. The parameters that will govern the investment will be laid out in the contract that will accompany the transaction.
The investment contract will need a number of different clauses to be established before it can be finalized. For example, the agreed-upon price of the shares, as well as the date by which the investor is required to transfer the money.
An investment transaction can include either a current shareholder of the company or a new shareholder just joining the company. The investor could also serve as the lead investor for a group of investors known as syndication.
Why is an Investment Contract Important?
There are two primary reasons why using a sample investment contract is of the utmost importance. To begin, just like any other kind of transaction, investment transactions include a significant amount of risk on the part of both the investor and the business. Both parties are responsible for effectively mitigating these risks in order to protect their respective interests, and those of any others they are bound to operate on behalf of.
For instance, an investment contract should include the procedures that are to be followed in the event that the parties involved are involved in a disagreement. This ensures that in the event that relations between the business and the investor become strained, each party is aware of the actions that they are legally permitted to take, and has a clear path to resolution and compensation, or an amicable split.
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What an Investment Contract Should Include
If you are looking to write your own investment contract, here are the key clauses that should be included.
A declaration made by the company’s founders or management that certain facts and particulars are correct at a particular moment in time is called a warranty.
If it turns out that the warrantied information is not true, the investor will have the right to file a claim for damages if they have incurred a loss as a direct consequence of the warranty turning out to be false.
The inclusion of warranties in the investment makes the contract a risk-reducing strategy, in spite of the fact that investors do their due diligence. There is always the possibility that there are certain hidden risks that the due diligence process may not discover.
In most cases, the founders or management who provide the warranty may qualify their statements by the use of a disclosure letter. The founder or management of a company has the ability, via the use of a disclosure letter, to specifically bring to the attention of an investor any circumstance which may cause one or more of the warranties to be erroneous. This, in turn, makes it possible for them to escape responsibility for providing a warranty that is not accurate.
The following are examples of typical warranties that are regularly included in investment contracts:
- The Ownership of Intellectual Content
- Disputes and obligations pertaining to taxes
- Disputes or lawsuits that are still pending against the corporation
- Authority to obligate the company to this contract
- Contracts and liabilities pertaining to the corporation
The goal of investors reserving a variety of rights in the investment contract is often to serve the purpose of safeguarding the investment that they have made in the business. The following are examples of the common rights that an investor would often reserve for himself in an investment contract.
- The right to obtain reports on the company’s finances and management. – Investors often maintain the expectation that they have the legal right to make a request for the company’s management and financial reports at any time. It needs to be in writing.
- Concerns that need the approval of investors – Sample investment contracts often contain a list of activities that a business is forbidden from engaging in without first obtaining the authorization of the investor. Because the company must get the investor’s approval before taking certain actions, the company is constrained in its capacity to take actions that might put the investor’s interest at risk.
This could include:
- Changes to the articles of incorporation
- The establishment of a new subsidiary
- Sale of the company’s intellectual property
- Taking on new debt
When entering into an investment contract, investors will often do so with the intention of reserving pre-emption rights and rights of first refusal. Because the investor has these rights, they are able to protect their investment from being watered down in the event that the company decides to sell further shares to other investors.
When developing a strategy for participation, it is in everyone’s best interest to have a number of different options in which that participation will be divided. There must be complete openness here. The majority of investors value having a voice in major decisions that will have an effect on their investment. They may grow agitated if they believe they are being excluded from critical decision-making processes.
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It is essential to include standard clauses within your contract. The term ‘boilerplate clauses’ relates to a group of standardized clauses which are always included in all contracts. The boilerplate clauses are often placed at the conclusion of every contract, whereas the primary, more substantial elements are placed at the beginning.
A notification clause is an example of a boilerplate clause. Notice clauses detail how and to whom any notifications that arise from the contract are to be served.
Other common examples of boilerplate clauses include:
- Entire agreement clauses.
- Rights of third parties.
- Clause severance clauses.
Additional fundamental terms and components that are essential to the completion of a sample investment contract should also be included in the document. This contains the names and addresses of the persons involved, as well as the date the agreement was signed and each party’s signature.
Some investor basic clauses include:
- Company name and address
- Company phone number and email address
- Legal names of principals involved in the business
- The amount invested in the business by each principal investor
- Percentage of ownership
It is quite possible that the investor will have access to a significant amount of the company’s sensitive information. In order to guarantee that such information is kept private at all times, a confidentiality clause is nearly always incorporated into a sample investment contract.
The proprietary and sensitive business information of the company is safeguarded by confidentiality provisions, which also specify what information may be shared with third parties and what information cannot. This clause also makes it very clear that neither party is permitted to disclose any information about the business to any third party without first obtaining the approval of the other party.
Covenants Not to Compete
Covenants not to compete, often known as non-compete clauses, ban business founders and managers from engaging in direct or indirect competition with their former partners.
Example of a not-to-compete clause:
“Each manager shall not participate or engage in any way whatsoever with any organization that competes or that is likely to compete with the operations of this business”
The management of the business is often required, as part of the terms of the sample investment contract, to supply investors with certain financial documentation on a quarterly basis. The company strategy, the budget, tax forms, and the management accounts are all examples of these documents.
Additionally, investors often need management to supply them with audited accounts of the business. If the business in question is a parent company, the audited financial statements of any subsidiaries, as well as the group’s financial statements, will often be required under certain circumstances. Additionally, it is anticipated that the investors would want access to the company’s financial records in order to conduct audits.
It is common practice to allow investors to retain the ability to choose a director of their choice to serve on the board of directors in an investment contract. In certain circumstances, investors will additionally stipulate that there will be no quorum at any board meetings that take place in the absence of the directors that they have selected for the board.
The presence of directors in a company is sometimes referred to as a “check” on the management of that company. They watch over the management of the business to make sure that it is operated in a manner that is beneficial to the shareholders, such as the investor.
They accomplish this goal by participating in major decisions that affect the company. They do this by offering the company the benefit of their experience. In doing so, they increase the likelihood that the company will be successful from a strategic point of view.
In addition to this, investors often retain the right to act as observers. This enables the investor to have nondirectors attend board meetings and get all of the information that is provided to directors, even if the nondirectors do not have voting rights.
Investors may use their observer rights to bring in other members of their team who possess knowledge that is distinct from that of the director. Because of this, the business has a larger possibility of success, which in turn increases the chances that the investor’s investment will increase in value.
It is common for sample investment contracts to stipulate that a deed of adherence has to be signed by any transferee of shares that were initially acquired by the investor.
The transferee is treated as if they were an original party to the investment contract when they sign a deed of adherence. As a result, the transferee will be liable to all of the terms and conditions of the contract if they sign a deed of adherence.
There are occasions when investment contracts may state that payments will be made in stages. This indicates that the investor will pay the whole amount of the investment over a period of time. Each payment is paid subject to the condition that certain milestones have been reached. For instance, payment for a certain part may be contingent upon the creation of a brand new product or service.
You need to be sure to include what will take place if the investor does not get their money back after a certain amount of time.
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Investment Contract Vs. Shareholders Contract
As mentioned earlier, investment contracts and shareholder contracts have many similarities; nonetheless, it is important to remember that these two types of contracts are not to be mistaken for one another.
A shareholders contract is an agreement that is entered into between the shareholders of a company. This agreement establishes the obligations of the shareholders of the company as well as the rules that outline how the shareholders are to exercise their rights with regard to the operations and management of the company.
On the other hand, a sample investment contract serves as the legal framework for a particular transaction in which an investor contributes money to a business in return for equity in that company, or returns in the form of interest on a loan, or convertible note. The terms of the contract are limited to that of the particular transaction being addressed.
Investment contracts lay out the terms of an investment for both parties involved. Including repayment or shares and ownership will work, as well as what to do in a dispute.
Each part of a sample investment contract needs to be clear, concise, and professional to protect both you and your investors, and streamline getting funded.
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