How to conclude an investment agreement?
How to conclude an investment agreement?
We have already repeatedly talked about the profitability of investments in Ukraine, and in this article we will tell you how to invest correctly from a legal point of view.
The agreement between the investor and the customer is drawn up in the form of an investment agreement of the established form in accordance with Article 9 of the Law of Ukraine “On Investment Activity”. In general, this is the main document (there is no investment code in Ukraine), which defines the legal and economic foundations of investment activities in the country. Also, if necessary, you can apply to the Resolution of the Cabinet of Ministers of Ukraine No. 112 “On approval of the Regulation on the procedure for state registration of agreements (contracts) on joint investment activities with the participation of a foreign investor. Although there are many templates and samples available on the Internet, an investment contract is not a document that you can draw up on your own without the help of a knowledgeable lawyer. However, you should still know its basic postulates.
Who is who?
The customer (founder) is the person leading the project, mainly the head of the enterprise. He is responsible for the funds provided by the investor and for the fulfillment of the obligations stipulated by the investment agreement. The customer is fully responsible for the financial results of the activity.
An investor can be a legal entity or an individual investing its own funds in financing a project. The knowledge and thought invested in the project is also considered an investment. The investor aims to make a profit for his contribution in the form of dividends or a share of the company with or without the right to manage and make decisions.
Expertise is an intellectual component of a project that can be a significant part of a deal. Usually, but not necessarily, the expertise belongs to the client. The profit of the financial investor must be at least twice as high as the profit according to the examination. In Ukraine, it is quite difficult to sell an idea to an investor if the other party does not invest funds, since it is believed that the author of the idea just wants to check its viability for other people’s funds.
What do you need to know?
Before signing an investment agreement, the parties conclude a memorandum or agreement of intent – a written statement of previously reached oral agreements. The memorandum is concluded before a legal entity is created or an investment project is launched. It states who the participants in the project are, their obligations and penalties for the parties. The memorandum is usually not valid in court.
Drafting an investment agreement requires the solid participation of all parties. Moreover, everyone should have their own lawyer who will take care of protecting their interests.
Important conditions of the investment agreement
The terms of the contract must provide for:
- subject of the contract;
- the purpose of entering the partnership;
- conditions of management and decision-making;
- the size and time of receipt of profits;
- the purpose and conditions of admission of new partners;
- entry of additional investors;
- conditions for withdrawal from the partnership.
Together with the investment agreement, there are usually two more binding documents: statutory documents and employment contracts.
The charter or corporate agreement governs the relationship between the parties and defines four main blocks:
- making a decision to increase the authorized capital. In the event of a spontaneous increase in the authorized capital by the customer, the investor can lose almost all of his dividends. This theme is vividly revealed in the social network feature film about Mark Zuckerberg and Facebook;
- making decisions on significant transactions – for amounts from half of the value of the company or its authorized capital. The size of such amounts is fixed;
- distribution of dividends: how much, when and how often the investor makes a profit;
- appointment of the general director and financial manager / chief accountant. The order of who chooses the executors of duties is established, the number of votes required for this, how often, etc.
Employment contracts form the legal basis of the company’s activities. Better is an open-ended employment contract with the most flexible terms. We need one, according to which one of the partners cannot dismiss employees unilaterally. At the same time, he reserves the right to quickly withdraw from the agreement to preserve his interests.
What does an investor get for his contribution?
In addition to direct income in the form of regular or one-time financial payments, an investor can receive a share in a company with or without decision-making power. Some investment projects provide the investor with a profit on a monthly, quarterly or annually short time after investment. Others begin to bear fruit after only a few years, or even decades.
There are also so-called options. For example, when a particularly valuable employee becomes the owner of a share in the company. In this case, a person is introduced to the co-founders or a bonus is prescribed in his employment contract that corresponds to the financial performance of the company.
Types of contracts
Convertible note, or convertible loan. The investor buys the company’s commitment to transfer the shares to him in the future. The essential terms of the contract are the amount of debt, maturity date, conversion terms, valuation limits and interest rate. For the investor, this method is beneficial in that he can get to know the company better, so that later he can decide whether to buy shares or return the loan amount.
For example, Uber has raised $ 1.6 billion in convertible debt from Goldman Sachs. The funding will be in the form of a six-year bond, which will be converted into equity at a 20-30 percent discount for Uber’s IPO valuation.
SAFE (simple agreement for future equity) is a simple agreement for future equity. An investor who provides a startup with funding gets the right to convert his investment into future equity capital. When issuing preferred shares, such an investor receives a share in the capital, often at a discount. Depending on the type of SAFE, it can prescribe the assessed value of the company, the right to a fixed advance discount of 10–20% of the share price or MFN clauses (the investor gets all the benefits that may be provided to other investors in the future).
KISS (keep it simple security). This agreement is very similar to a convertible bond. Interest is charged on the financing amount at a certain rate (usually 4-5%), and a maturity of 18 months is also fixed. After the expiration of the term, the investor can convert the amount of his investments, including interest, into preferred shares of the company. Such an agreement must fix the interest rate, maturity, terms of conversion and measurement limits. The advantage of KISS is the receipt of low-cost financing in a short time frame without lengthy paperwork and negotiations.
Ukraine. Before signing the documents, you need to decide which type of contract will be beneficial. The options available depend on the jurisdiction under which the future contract will be concluded. There are much fewer of them in Ukraine than in the world.
In Ukraine, the following options are possible:
Entering the authorized capital by purchasing shares or stakes in the authorized capital. For example, you invest in the authorized capital of $ 1,000. oh, and you get a 10% share. This is a common investment method in Ukraine. It is convenient, does not need additional tax obligations, provides for transparent relations and provides the investor with the opportunity to legally receive income.
A loan agreement is also a fairly common way to register investments in Ukraine. It is fully included in the legal field and allows you to legally receive income from financing a startup in the form of interest. The only drawback is that the amount of the startup investor’s income at the initial stage is limited by the amount of interest, and if the startup is successful, the investor will not be able to scale his profit from owning a stake in the project.
Joint venture agreement. As a contribution to joint activities, the investor can provide funds, and the company can attract its personnel to work. As a result, each of the parties will have a certain share in the joint activity, for example, with a percentage of 20:80. This option is rarely used, since it has a number of disadvantages, including the need for registration, inconvenient taxation, and the need to further divide not only the company’s profit, but also all intellectual property rights and even existing property.
Starting a good business without outside start-up capital is not an easy task and not everyone can afford it. But finding an investor is only half the battle; you also need to properly interact with him in order to get profit without unnecessary hassle. An investor, however, needs to weigh the pros and cons before risking his own funds, to ensure the ability to control the project during its implementation, and to secure himself as much as possible in terms of making a profit. This is the main thing that you need to know for those who intend to conclude an investment agreement and develop their monetary intelligence.