Investment Agreement Provisions: What You Need to Know
Investing in a company can be a lucrative opportunity, but it can also be risky. To protect both parties involved, an investment agreement is usually put in place. This agreement outlines the terms and conditions of the investment and often includes provisions that safeguard the investor`s interests. Here, we`ll discuss some of the most common investment agreement provisions that you should be aware of.
1. Valuation
The valuation provision specifies how much the company is worth and how much the investor will be investing in exchange for shares. This provision is important because it determines the percentage of ownership the investor will have in the company. It`s important to note that the valuation can change over time, so this provision may be revisited in subsequent agreements.
2. Preferred stock
Preferred stock is a type of stock that gives the holder certain rights that common stockholders don`t have. For example, preferred stockholders might have priority in receiving dividends or might have a greater say in how the company is run. If preferred stock is being issued, it should be explicitly stated in the investment agreement.
3. Board of directors
The board of directors is responsible for making major decisions on behalf of the company. The investment agreement may include provisions outlining how many seats on the board the investor will have, whether the investor will have voting rights, and what decisions will require the investor`s approval.
4. Information rights
Investors typically want to stay informed about the company`s financial performance and progress. The information rights provision outlines what information the company is required to provide to the investor and how often. This may include financial statements, progress reports, and other pertinent information.
5. Anti-dilution
Anti-dilution provisions protect the investor from losing value in their investment if the company issues more shares in the future. If the company issues more shares at a lower price than the investor paid, the anti-dilution provision would typically require the company to issue the investor additional shares at the lower price to compensate for the decrease in value.
6. Exit strategy
Investors want to know how and when they can get their money back, so the exit strategy provision outlines the options for selling shares or exiting the investment. This can include initial public offerings, mergers and acquisitions, or buybacks.
These are just a few of the many provisions that may be included in an investment agreement. It`s important to work with a knowledgeable attorney to ensure that the agreement is comprehensive and protects your interests. By understanding these provisions, you`ll be better equipped to navigate the investment process and make informed decisions.