Investment and Shareholders Agreements are legal instruments that regulate the relationship between the investor in a startup or company, as well as their rights and responsibilities within the company. These agreements allow the parties to manage risks, protect their interests and build trust in the investment process, all with the aim of regulating the rights and commitments of the parties and formalising the investors’ participation in the company.
Investment agreements: most important clauses
What are the most important clauses to negotiate between the parties when drafting the investment agreement? It is important to consider the following:
- Purpose and terms of the investment: This clause sets out the purpose and nature of the investment. It regulates the financial and operating conditions of the investment, i.e. it includes aspects such as the expected valuation of the target company, the amount of the investment, the timetable for the disbursement of funds, the forms of financing (capital, loans, etc.), the percentage of shares to be issued and any preconditions for the realisation of the investment.
- Generic suspensive conditions clause: certain conditions are set out that must be fulfilled before the agreed investment can be completed or become effective. These conditions may vary depending on the specific circumstances of the investment and the parties involved, but generally relate to issues such as obtaining regulatory approvals, verification of certain financial statements or satisfaction of other legal or commercial requirements.
- Reps and Warranties: the purpose of this clause is to assure investors that the company is financially stable, and that there are no known risks on the part of the founders or current partners that could cause a significant decline in the value of the company.
- Composition of the shareholders’ meeting and enhanced majorities: this regulates the rules and procedures related to important decisions that require the approval of the shareholders of the investee company. This clause is fundamental to guarantee the participation of investors in strategic decision-making and to protect their interests within the company and, to this end, a reinforced majority can be established for strategic decisions, such as modifications to the company’s corporate purpose, mergers, acquisitions, significant changes in the capital structure, among others, which will be previously defined and detailed in this agreement.
- Management body: this clause establishes the composition of the company’s management body. It details the governance structure and how members are elected or appointed, their role in strategic decision-making and day-to-day management of the business, as well as the procedures for its proper functioning.
- Tenure and non-competition of founders: The purpose of this clause is to establish a minimum period of commitment for the founders of the company, ensuring their continued involvement and participation in the management and direction of the business to maintain long-term stability and growth. Also, in some cases, clauses may be included to prevent founders or key employees from competing directly with the company after their exit.
- Restrictions on the transfer of shareholdings: rules on the transfer of shareholdings are established in order to protect the stability and control of the company.
- Investor protection clauses: provisions can be put in place to protect investors’ interests in situations such as dilution in share capital, changes in the company’s management, events that may negatively affect the value of the investment, as well as a “put option” that gives investors the right, but not the obligation, to sell their shares in the investee company at a specific price at a specific time. This option gives investors a way to protect their investment and ensure an exit in case circumstances change or their investment objectives are not met as planned.
- Liquidation clause: this defines the terms and conditions under which an investor may liquidate their investment, either through a sale of units, a takeover or a public offering. It may also establish whether investors have preference over other partners in the distribution of proceeds in the event of a liquidity event of the company.
In the complex web of business investment, investment and partner agreements act as anchors, ensuring stability, protecting interests and cultivating trust between the parties involved, thus outlining the path to shared success.
Article written by
Attorney – Corporate and M&A
pilar.casasnovas@metricson.com
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