Head of International Corporate Law and Fintech Practice
Expert in fintech, crypto, and international corporate law with over 20 years of experience. Specializes in crypto licensing (VASP/CASP), iGaming business support, and international structuring, asset protection, and OSINT analytics for risk assessment and due diligence.
Development of the investment agreement
An investment agreement is a key tool in managing finances and investments. It establishes the rights and obligations between the investor and the investee company.
The development of such a document requires careful analysis and consideration of various aspects covering the risks, rights, and responsibilities of the parties.
Overview of Investment Goals
The first step in the development of an investment agreement is to determine the investment goals of the parties. This includes a thorough analysis of what each party hopes to achieve through the deal.
For an investor, this may include:
- Financial goals: For example, obtaining income from investments or increasing capital.
- Strategic goals: For example, gaining control over a certain market sector or developing a specific line of business.
For the investee company, this may include:
- Business Development: Raising funds to expand or launch new products or services.
- Maintaining financial stability: Obtaining capital to repay debts or cover current expenses.
For example, let’s imagine a situation where a technology startup is looking for investment to develop its product.
The investor may aim to gain control over certain aspects of the startup’s business or hope to receive a percentage of the profits if the startup becomes successful.
On the other hand, for a startup, investment can be a key source of funding to develop new features and scale its product in the market.
Taking these goals into account in the investment agreement helps align the expectations of the parties and create a basis for successful cooperation. In addition, it helps to avoid future misunderstandings and conflicts, as a common vector of movement and the goals to which the parties are directing their efforts are determined.
Terms and obligations of the parties
The investment agreement must clearly define the terms and obligations of the parties. This may include the investment amount, time frame, terms of return on investment, profit sharing, and business management.
For example, it may specify that the investor is entitled to a dividend payment of a certain percentage of the company’s profits each year.
Interest for the use of investments can be paid in two main ways:
- The contract specifies a fixed amount, it is considered unchanged throughout the entire investment project, and payments must be made exactly on time. Of course, from time to time there may be situations in which the customer cannot pay the money on time. In this case, it is necessary to stipulate this moment with the investor. With the depositor’s consent, the payment term can be extended, but this provision must be included in the investment contract;
- Payment depends on the profit received, which is called approximate. Sometimes projects are long-term, and it is almost impossible to predict the exact profit. In this case, an approximate value of profitability is set, and it can be adjusted in both directions. Investors are generally not satisfied with this option, as they want to know that their funds are protected and they will receive the money they expect.
Protection of the parties’ interests
Protection of the interests of the parties is a key aspect of the development of an investment agreement, as it defines the rights and obligations of each party and ensures their interests throughout the agreement.
For an investor, this may include:
- Rights to control the investment: The investor may request the right to monitor the activities of the company in which he invests or the right to participate in strategic decisions.
- Right to indemnification of risks: An investor can request safeguards, such as guarantees or insurance policies, that protect his investment against risks and losses.
For the investee company, this may include:
- Protection from unscrupulous investors: A company can include clauses in the investment agreement that protect it from unscrupulous investors who may try to interfere with management or harm the business.
- Confidentiality of Information: The Company may require the Investor to maintain confidentiality regarding confidential information about the Company’s business, technology, and strategies.
For example, in the case of a start-up that attracts investment for the development of a new product, the protection of the interests of the parties may include the rights of the investor to receive regular reports on the development of the project and to participate in strategic decision-making.
On the other hand, the company can include measures in the contract that protect its technology and confidential information from misuse or disclosure.
Taking these aspects into account in the contract allows the parties to feel protected and trust each other, which contributes to effective cooperation and the achievement of common goals.
Risks and liability
The development of the investment contract should foresee the possible risks that may arise during the investment and determine the responsibility of the parties for their resolution.
Understanding these risks and defining responsibilities helps maintain mutual trust between the investor and the company, as well as reduce potential conflicts in the future.
The main risks that can be included in an investment contract can include:
- Financial risks: Such as market volatility, changes in exchange rates, the company’s financial obligations, and other financial risks.
- Legal risks: Related to violations of legislation, non-fulfillment of contract terms, lawsuits, and other legal aspects.
- Operational risks: Related to the activities of the company itself, such as technical problems, unsuitability of the product or service on the market, changes in the management team, etc.
Mechanisms for managing these risks may be established in the investment agreement.
Example:
- Dispute Resolution Procedures: The Agreement may provide for dispute resolution mechanisms between the parties, including mediation, arbitration, or litigation.
- Risk insurance: The agreement may include conditions for mandatory insurance that protects the investor from certain risks.
- Definition of responsibility: The contract can clearly define who is responsible in the event of risks, and what measures should be taken to avoid them or mitigate their consequences.
The development of an investment agreement taking into account these aspects allows the parties to interact based on mutual protection and trust, as well as to minimize potential conflicts in the future.
Final Tips
Development of an investment agreement is a complex process that requires careful analysis and understanding of all aspects. Carefully working out conditions and obligations will help to avoid misunderstandings and conflicts in the future.
Taking into account the above aspects, the development of an investment contract can become an effective tool for the successful attraction and management of investments.
For advice on the development of an investment contract, contact the experts Prikhodko and Partners.
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