Introduction
In January 2023, Microsoft announced continuing the joint venture partnership with OpenAI. The investment is speculated to total worth $10 billion. This third phase of the long-term engagement of Microsoft with OpenAI will help in including a multiyear, multimillion-dollar commitment to accelerate AI advances and guarantee that these benefits are widely shared throughout the globe.
These agreements are legally binding contracts that detail the provisions of a financial investment. Such agreements are commonly employed when a corporation seeks funding from financial backers in return for ownership or liabilities. Agreements with investors may contain clauses like the investment sum, the ownership share, the authority and liabilities of the investor, and the provisions of the investment.
Agreements with investors offer advantages for both parties, the business and the investor. In the case of the company, investment contracts give essential capital to facilitate growth and expansion. For the shareholder, shareholder agreements give a potential investment opportunity in a promising company and potentially make a profit on their investment.
There exist diverse categories pertaining to investor deals. These include investor agreements, convertible debt agreements, and simple agreements for future equity. Every kind of arrangement possesses its distinct characteristics and advantages. Investor agreements have significant legal value, specifying the terms and conditions of an investment. And the above investment by Microsoft into OpenAI demonstrates a recent venture that has received notice within the technology sector.
Importance of an Investor Agreement
Investor Agreement offers a structure for the relationship between investors and businesses. This legally binding agreement defines the conditions and provisions of the investment venture. It provides clearness, security, and agreement of concerns for both sides.
To begin with, an Investor Agreement defines the privileges and obligations of the financial backers and the business. It outlines the investment value, shareholding, and any particular terms or anticipations associated with such investment. Such clarity aids in reducing possible confusion or conflicts that could happen during the investment venture.
The arrangement highlights the responsibilities and promises of both individuals. It outlines the obligations of the firm regarding the provision of frequent financial and operational statements to the shareholders. Likewise, it describes the duties of the individuals who invest. He is accountable for supplying consistent help, specialization, or admission to their connections. The promises guarantee openness and nurture a mutually profitable connection.
Furthermore, an Investor Agreement covers governance and decision-making. It might outline the privilege of the shareholders to be seated in the directorate or participate in crucial determinations. Such participation enables stakeholders to be actively involved in the future course of the organisation. It protects their financial stake and harmonises their concerns with the company’s progress. There is a possibility of including in the agreement clauses related to IP rights, secrecy, and restrictive covenants.
These measures secure the company’s valuable possessions and make sure that the investors’ stakes are protected. It establishes specific rules regarding the utilisation, control, and safeguarding of intangible assets created throughout the investment.
Types of Investor Agreements
Investment agreements are legally enforceable arrangements in which an investor transfers cash or assets to another party in exchange for rights or returns. These agreements safeguard both parties’ interests and set the investment relationship’s parameters. Investment agreements are typically:
Stock Purchase Agreement: Companies with several stockholders employ this agreement. It details shareholder rights, duties, and obligations, including voting rights, dividend distribution, management control, and dispute resolution. Investors utilize this agreement to buy firm shares. It outlines the stock purchase terms, including the price per share, the number of shares to be purchased, and any restrictions or guarantees.
Statutory Stock Option Agreement: Statutory stock options are also called Incentive Stock Options or Qualified Stock Options. The Internal Revenue Code governs these specific sorts of stock options. Statutory stock options provide tax advantages but also have stringent limitations that initially cost the corporation more. One of the limitations is that these options may only be issued to corporate personnel, and the proposed price must be less than the market value per share.
Restricted Stock Agreement: This stock agreement includes clauses restricting the investor’s capacity to assume ownership of the equity interest (or enable the company to claim ownership) depending on a certain event or event. This sort of stock agreement may be used for stocks or LLC ownership interests and can work with direct equity, stock options, or the different methods to issue LLC ownership interest.
Joint Venture Agreement: A joint venture agreement is made when two or more parties work together on a commercial initiative. The agreement details the joint venture participants’ contributions, duties, profit distribution, and decision-making.
Subscription Agreement: This agreement is used in private placements or investment vehicles. It sets the terms and circumstances under which an investor subscribes to acquire shares or units in the offering, including the subscription price, payment periods, and investor representations and warranties.
Commission Agreement: This agreement is better appropriate for those who do not want to own the firm but would rather invest in its earnings or goods. Here, an investor gives up money in return for a percentage or cash amount that vests over time.
Convertible Debt Agreement: Convertible debt enables an investor to lend money to a firm and repay the loan or convert the debt into a stake in the company. This creative agreement is written to reflect the parties’ objectives. The contract conditions decide whether the debt is converted to ownership or repaid.
Nonstatutory Stock Option Agreement: A nonstatutory stock option is called a Non-qualified Stock Option. A stock option is the ability to purchase the stock later for a price set at the beginning. As the company’s value rises (ideally), one can get instantaneous profits when one exercises such stock options.
Deferred Compensation: Deferred compensation does not result in ownership but permits the receiver to acquire ownership via another arrangement. Employees who agree to get bonuses or higher pay later in exchange for the job are an example.
Essentially, their time commitment is an investment for the benefit of the corporation that will vest later via a deferred compensation arrangement.
Different investment agreements presented above apply in different scenarios. They may be mixed to meet the needs of the unique circumstance between the investor and the company’s owner.
What to Include in an Investor Agreement?
Here are some important aspects to consider when drafting an Investor Agreement:
Investment Details: Under this clause, one needs to state the investment amount, the ownership share the investor will get, and any special arrangements, such as milestone-based financing or staged investments.
Rights and Obligations: The investor and corporate rights and responsibilities should be defined. Board representation, voting rights, information access, consent rights for significant decisions, financial reporting and audit requirements may be included.
Exit Strategies: This includes arrangements for the investor’s departure, such as a share sale, IPO, or acquisition. One may define any limits on share transfers, rights of first refusal, or tag-along/drag-along rules.
Governance and Decision-making: This explains the investor’s role in strategic choices. Board representation, executive appointments, and veto or approval powers should be addressed.
Intellectual Property: Specify ownership, usage, and protection of intellectual property rights, including any limitations or licenses related to the investor’s investment.
Non-compete and confidentiality: To protect the investor’s interests, execute non-disclosure agreements (NDAs) and non-compete clauses.
What are the Options for the Investor to Exit the Investment?
The exit plan may determine the venture’s success by guiding investment returns. Here are some frequent exit alternatives for investors.
Initial Public Offering (IPO): An Initial Public Offering (IPO) occurs when a privately held business opts to make its equity available to the public for the initial occasion. Initial investors now have the option to sell their ownership stakes through public trading. Firms frequently seek IPO opportunities if they possess significant growth prospects and require financial support to extend their activities. This enables them to collect money from public investors and enhance their economic funds.
Merger or Acquisition: The investor might sell their ownership in the firm via a merger or acquisition. Investors may sell their shares at an agreed price if a bigger firm buys the target company. Mergers and acquisitions may increase values and liquidity. Such prospects rely on market circumstances and possible acquirers’ desires.
Secondary Market Sale: Private business investors may also sell their shares on the secondary market. Without an IPO or merger, secondary markets let investors purchase and sell privately held company shares. Early investors may sell their shares in these marketplaces before the firm becomes public. SharesPost, EquityZen, and specialised private marketplaces are examples of secondary markets.
Buyback Agreement: A buyback agreement may allow the corporation to repurchase investor shares. This may help investors sell their stock. The corporation and investor usually discuss the buyback’s price and timeframe. Investors might benefit from buyback agreements since they provide a straight exit without market constraints or other parties.
How to Negotiate an Investor Agreement?
Negotiating an investor agreement necessitates careful consideration and strategic communication to ensure that the terms and conditions align with your investment goals while mitigating potential risks. The process involves several key steps to guide you through successful negotiations.
Firstly, it is crucial to understand your investment objectives and desired outcomes clearly. Define your priorities, risk tolerance, and expectations from the investment contract. This clarity will enable you to communicate your needs during negotiations effectively. Thorough due diligence is paramount before entering into negotiations.
Gather all relevant information about the investment opportunity and the involved parties. Review financials, business plans, legal documents, and other pertinent details. This comprehensive research provides a deeper understanding of the investment’s potential and associated risks, empowering you to negotiate from a position of knowledge.
Then, identify the key terms and conditions of the investment contract that are critical to achieving your objectives. These may include investment amount, ownership structure, voting rights, profit-sharing mechanisms, exit strategies, and specific requirements. Prioritise these terms and prepare to negotiate them effectively.
Furthermore, develop a negotiation strategy based on your objectives and desired outcomes. Determine your walk-away points and alternatives if the negotiation does not yield favourable results. Establish target goals and a range within which you are willing to compromise.
Effective communication plays a pivotal role in negotiations. Clearly articulate your interests, concerns, and desired terms. Actively listen to the other party’s perspectives and seek to understand their position. Maintain a respectful and assertive approach, fostering an environment conducive to finding mutually beneficial solutions. Consider seeking professional advice during negotiations. Consulting legal, financial, or industry experts can offer valuable insights, identify potential pitfalls, and provide guidance regarding the legal and financial implications of the investment contract.
Strive to create win-win solutions that address the interests of all parties involved. Identify areas of common ground and explore mutually beneficial compromises. Collaborative approaches build stronger relationships and increase the likelihood of reaching a favourable agreement.
It is necessary to ensure that the agreed-upon terms are accurately documented in a written agreement. The agreement should encompass all key terms, conditions, rights, responsibilities, and agreed-upon safeguards. Conduct a thorough review and seek legal advice to ensure accuracy and consistency before signing the agreement.
Successful negotiation is a collaborative process requiring flexibility, compromise, and effective communication. Adapt your approach as needed and maintain a constructive mindset throughout the process. By following these steps, you can navigate the negotiation process confidently, increasing the likelihood of reaching a favourable investment contract agreement.
What are the Differences between Investor Agreement and Shareholders Agreement?
While we have already discussed the importance and different aspects that must be included in the Investor Agreement, we shall distinguish Investor Agreement from Shareholders Agreement. Investor Agreements are commonly confused with Shareholders Agreements by Corporations around the world, even though both are quite different from each other.
| INVESTOR AGREEMENT | SHAREHOLDER AGREEMENT |
| An Investor Agreement is a contract outlined for entities that will inject capital into the functioning of the company. | A Shareholder Agreement is for those entities who will partner up with the existing Shareholders to oversee the decision-making of the company. |
| The parties to the Investor Agreement are Investor and Company. | The parties to the Shareholder Agreement are Shareholder and Company. |
| The Investor Agreement lays down the investment transaction. | The Shareholder Agreement sets out the decision-making procedure for the company’s functioning. |
| The Investor Agreement will deal with the transaction and not affect the functioning of the company. | The shareholder will affect the functioning of the company as it would provide the proper guidelines for the Shareholders to exercise their rights and powers. |
| The Investor Agreement will deal with the transaction and not affect the functioning of the company. | The shareholder will affect the functioning of the company as it would provide the proper guidelines for the Shareholders to exercise their rights and powers. |
| The Investor Agreement will deal with the transaction and not affect the functioning of the company. | The shareholder will affect the functioning of the company as it would provide the proper guidelines for the Shareholders to exercise their rights and powers. |
| The Investor Agreement stresses the obligation of the company towards the investor in return for the Investment Amount. | The Shareholder Agreement provides for the rights and responsibilities of the Shareholders towards the company. |
| The Investor Agreement does not empower the investor to have any control over the operation of the company. | The Shareholder Agreement empowers the shareholder to be involved in the key decision-making activities of the company. |
| The Investor’s Agreement emphasizes the aspect of investment. | The shareholder emphasizes the shares of the company. |
Sample Template of Investor Agreement
INVESTOR AGREEMENT
This INVESTMENT AGREEMENT is made at on the ______ day of ________, ______by and between
___________________(hereafter referred to as the “INVESTOR“) which expression shall, unless it is repugnant to the subject or context thereof, mean and include its representatives, successors in title and permitted assigns) being the party of the FIRST PART.
AND
_________, an entity having its registered office at __________________(hereinafter referred to as “COMPANY” which expression shall, unless it is repugnant to the subject or context thereof, mean and include its representatives, successors in title and permitted assigns) being the party of the SECOND PART.
The Investor and the Company may be individually referred to as a “Party” or collectively as the “Parties“.
WHEREAS,
The Company was incorporated on ____ under _________ [Statute] dealing with __________[Business].
The investor has agreed to provide the company with a non-refundable grant of _____________as an investment (hereinafter referred to as “INVESTMENT AMOUNT.”
The investor wishes to invest the Investment Amount in the company, and the company wishes to accept this investment in exchange for shares in the company.
NOW THEREFORE, THE PARTIES ARE ENTERING INTO THIS AGREEMENT TO RECORD THEIR MUTUAL UNDERSTANDING WITH RESPECT TO, INTER ALIA, THEIR INTER SE RIGHTS AND OBLIGATIONS BY VIRTUE OF THEIR RESPECTIVE SHAREHOLDING IN THE COMPANY, THE MANAGEMENT OF THE COMPANY AND CERTAIN OTHER MATTERS AS SET FORTH HEREIN BELOW.
TERMS
The first half of the Investment Amount will be paid by the investor to the company on or around ____________.
The second half of the Investment Amount will be paid by the investor to the company within __________ of the company having started its participation in the accelerator program organised by the investor.
The investor shall be entitled to be allocated _______ on the completion of the investment by the investor.
The company shall report to the investor the reasonable information regarding the daily operation of the company where the Investment Amount is being expended.
As a return for the Investment Amount, _____ percentage of the net profit earned by the company shall be distributed to the investor on an (annual /biannual) basis via (check or bank deposit) on the ________.
The investor has agreed that the distribution may be paused or postponed under the circumstances in which the company needs to retain income to maintain a healthy and positive financial condition.
The company shall send to the investor and any observers appointed by them
Reasonable advance notice of each Board meeting and each committee of it and
A written agenda for each Board meeting and each committee meeting, accompanied by all relevant papers.
The company shall prepare such business and financial information in such format as the investor reasonably requests and shall send copies to the investor within 30 days of the end of each fiscal quarter.
NON- DISCLOSURE CLAUSE
Neither party may discuss or disclose any information or originate any publicity, news release, or other public announcement, written or oral, whether to the public press, stockholders, or otherwise, regarding the terms and conditions of this agreement or the performance by either party of its obligations under this agreement.
However, the parties may discuss, disclose, or originate publicity, news releases, or other public announcements relating to information which
Becomes generally available to the public other than as the result of unauthorised disclosure by either party;
Becomes available to either party in a manner that is not in contravention of any applicable laws from a source that is not bound by a confidential relationship with the other party; or
Either party reasonably determines what is appropriate for disclosure under any applicable law or is required to be disclosed by any law, court order, or other legal process, including, without limitation, federal securities laws.
With respect to disclosure under item (C) above, the disclosing party will notify the non-disclosing party of its obligations to disclose where:
The non-disclosing party shall have the right to confirm through an opinion of the disclosing party’s counsel the obligation to disclose, and
The parties will coordinate all such disclosures to the reasonable satisfaction of both parties.
TERMINATION CLAUSE
In the event the company dissolves the agreement within ______following its execution, for any reason stated, then the investor shall have the right, but not the obligation, to terminate this agreement. This option must be exercised in writing within ________ following the termination.
If the investor exercises such right, the company shall immediately, but in no event less than _____, pay to the investor a cash payment equal to the Investment Amount.
The notice of such dissolution on the part of the company shall be given to the investor prior to ____ in writing.
The investor shall be entitled to ___ percentage of the appreciated value of the company based on the number of shares the investor owns in the company at the time of termination.
The investor shall not have the right to payment on the physical assets of the company.
NO PARTNERSHIP
Nothing in this agreement is intended to or shall be construed as establishing or implying a partnership of any kind between the parties.
VARIATION
A variation of this agreement shall only be valid if it is in writing and signed by the company, by the investor and by Shareholders (other than the investor) holding between them at least 50% of the issued share capital of the company, in which event such change shall be binding against all of the parties hereto provided that if such change would detrimentally affect the rights of a party, the consent of the affected party to that variation shall be specifically required.
WARRANTY OF AUTHORITY
All the Parties have the authority to execute and be bound by the terms of this agreement, and the agreement shall not be invalid for want of an authority to execute and be bound by the terms thereof.
COSTS
The Costs and expenses incurred in relation to the negotiation, preparation, execution and performance of this agreement shall be borne by the party that incurred the Costs in entirety.
FURTHER ASSURANCE
Each party shall have the obligation to promptly execute and deliver all such documents and perform all such responsibilities as the other party may timely and reasonably require for the purpose of bringing the agreement to full force and effect.
TERMINATION
Both the Investor and the Company have to consent to the termination and assent to the termination contract pursuant to this clause.
The investor shall request for the termination of the agreement not later than 60 days prior to the date when the termination is intended.
When the investor notifies the company of such intent to terminate the Agreement, Investor has the right to sell the shares owned by him.
In such a case, the majority shareholder will first be given the right to purchase such shares, followed by other shareholders.
In case all the existing shareholders refuse to purchase the shares of the investor, only then can the investor seek to sell the shares to any outside third party.
The majority shareholders of the company shall approve of the entity to whom the investor can transfer the shares in the manner of purchase.
WAIVER
The waiver by either party leading to the breach of the provision contained in this agreement shall not operate or be construed as a waiver of any subsequent breach by either party.
SEVERABILITY
In the event that a court of competent jurisdiction declares any provision(s) of the agreement to be invalid or unenforceable for any reason, this agreement will remain binding on both Parties and just the invalid or unenforceable provision(s) will be modified or removed.
NOTICES
a.Any notice and other communications provided for in this agreement shall be in writing.
i.In the case of notice to the company _______
In the case of notice to the investor at the registered office at _____________________
ARBITRATION
The law governing this agreement shall be in accordance with the laws of ____. Any dispute of whatsoever nature which arises between the parties out of or relating to the interpretation of any provision of the agreement that cannot be settled by good faith and negotiations between the parties within _______ of the commencement of negotiations shall be settled by mutually referring the dispute to a sole Arbitrator appointed under the ___________ and the award made in pursuance thereof shall be binding on the parties.
The cost of arbitration shall be divided equally. The seat of arbitration shall be in ___________. The language of the arbitration shall be English. This agreement and the interpretation of its terms shall be governed by and construed in accordance with the laws of the ________ and subject to the exclusive jurisdiction of the federal and state courts located in __________.
IN WITNESS WHEREOF THE PARTIES HERETO HAVE SET AND SUBSCRIBED THEIR RESPECTIVE HANDS AND SEALS ON THE DAY, MONTH AND YEAR FIRST HEREIN-ABOVE WRITTEN.
For ______________________(Investor),
______________________________
For ______________________ (Company),
_______________________________
Conclusion
Therefore, the investor’s agreement underlines the necessity of preserving the interests of the parties involved and building a mutually beneficial collaboration. It specifies the need to outline the investment’s goals and expectations. Investors must explicitly express their financial objectives, projected returns, and any particular milestones they anticipate the entrepreneur will reach. And on the other hand, entrepreneurs should convey their company vision and strategy simultaneously, guaranteeing alignment with the investor’s goals. This transparency lays the groundwork for a successful and healthy collaboration.
The investor agreement also underlines the significance of escape alternatives. A well-defined exit strategy allows investors to realise their profits and entrepreneurs to pursue growth prospects.
Finally, the “Investor Agreement” serves as a thorough guide for both investors and entrepreneurs, outlining the critical components of a successful investment relationship. It emphasises the significance of formalising agreements to preserve the interests of all parties involved by stressing clear communication, legal protections, and explicit exit routes. Such agreements establish the framework for a productive and mutually beneficial partnership, encouraging development and maximising investment potential.
Frequently asked questions
What happens if there is a dispute between the investors or with the venture?
If a dispute arises between investors or with the venture in relation to an investment contract, the parties involved may resort to dispute resolution methods. This can include negotiation, mediation, arbitration, or litigation, depending on the terms specified in the contract or applicable legal frameworks.
