What should an investment agreement contain?

What is an investment agreement?

An investment agreement is an unnamed contract; it is not regulated in the Civil Code or in any other statute. Its provisions must not conflict with mandatory provisions of law. The agreement may be concluded in writing, in paper form or in electronic form; importantly, a notarial deed is not required (a notarial deed will be required if the subject matter of the agreement is shares in a company or real estate).

Purpose of an investment agreement

The essence of an investment agreement is the investment of capital, knowledge, skills, property and other assets in the establishment of a new business or the development of an existing one. Most often, the subject of the investment will be a sum of money. The beneficiary receives capital for the development of their business, and the investor is granted specific rights regarding the company. The agreement sets out the rules, method, deadlines, amount of the investment, profit sharing and all other relevant factors relating to the transfer of capital to the designated entity. The contract governs the entire course of the investment as well as the rights and obligations of the parties. The rights and obligations of the parties should be described as precisely as possible so that, in practice, there is as little doubt as possible regarding the application of the agreement.

Content of the investment agreement

The law does not specify which particular provisions must be included in an investment agreement. Below are provisions that may appear in an investment agreement:

1. Identification of the parties to the agreement – the parties to the agreement shall be the investor contributing their capital and the entity for which that capital is contributed. The parties may be natural persons, legal persons and organisational units without legal personality;
2. Subject matter of the agreement – specification of the capital intended for the start-up or development of an existing business. The requirements for specifying this in the agreement will vary depending on the type of investment. Determination of the amount of the financial contribution, and a precise description of the know-how being contributed to the business. The agreement must describe in detail the investment process, its stages, and the deadlines for capital transfers. The agreement should specify the exact purpose of the investment and the intended future outcomes;
3. The agreement must set out all the rights and obligations of the parties arising from its conclusion;
4. The agreement must include information regarding the ownership structure of the entity in which the investment is made. In connection with the investment, the investor may be entitled to a certain proportion of the shares in the company. It is essential that the agreement specifies whether, and if so, in what quantity and on what terms, the investor acquires shares in the company in which they have invested. Should the company’s shareholding structure change as a result of the investment, the agreement must precisely specify: the distribution of shares amongst the shareholders, the nature and value of contributions made to the company, the rules for appointing the company’s governing bodies, and the shareholders’ obligation to make specific amendments to the articles of association;
5. Information regarding profits and losses – the agreement must specify the investor’s share, usually expressed as a percentage, in the profits and losses of the investment;
6. Clauses concerning intellectual property rights, copyright, trademarks, rules relating to trade secrets, and non-competition provisions;
7. Provisions regarding contractual penalties for breach of the rights and obligations arising from the investment agreement;
8. Lock-up clause – this is a clause that prevents the disposal of shares held by a partner for a specified period set out in the agreement. The clause may apply to all shares or only to selected shares belonging to a specific person. It may protect the investor from losing a key partner who is most involved in the company’s affairs, or protect the company from being sold quickly to a third party after the investment has ended;
9. Anti-dilution clause – protects the investor against a reduction in their stake in the company. It ensures that the investor automatically acquires the appropriate number of shares in the event of a new issue. The clause guarantees that the investor’s percentage stake in the company will remain unchanged;
10. Tag-along clause – this is not essential. It restricts the freedom to dispose of shares, protects the interests of minority shareholders, and introduces the possibility of demanding the sale of one’s shares on the same terms as the controlling shareholder;
11. Drag-along clause – this allows a shareholder who has found a buyer for their shares to require other shareholders to sell their shares as well. It is not necessary in an investment agreement;
12. Dispute resolution clauses – the agreement should contain provisions regarding the resolution of potential disputes;
13. In the event of the investment failing and the need to liquidate the company that was its beneficiary, a clause may be included allowing the investor to be given preferential treatment during the company’s liquidation.

Investment Agreement – Summary

An investment agreement is a complex contract aimed at the development of a business. It most often involves the transfer of large sums of money and entails significant liability. When concluding an investment agreement, its provisions must be analysed very carefully to ensure they do not infringe upon the interests of the company and the investor. The contractual provisions should minimise the investor’s risk, whilst protecting the entrepreneur’s ownership rights in the company.