Introduction

When it comes to securing investments for your startup or considering investing in startups, having a well-structured Investment Agreement is vital. These agreements not only attract potential investors but also ensure that everyone's interests are legally protected. In this blog post, we will explore five key clauses that should be a part of any investment agreement, breaking down the legal jargons to make it accessible for all stakeholders.

• Valuation: Valuation in the context of an Investment Agreement refers to the process of assessing the monetary worth of your startup.
  1. Pre-money valuation: This represents the estimated value of the startup before the investor's capital infusion, essentially quantifying what the business is worth at its current stage, excluding the new investment.
  2. Post-money valuation: On the other hand, this accounts for the pre-money valuation plus the amount of the investor's capital injection, indicating the startup's projected value immediately after the investment.
  Pre-money valuation is crucial as it directly influences the ownership stake the investor will acquire in exchange for their funding, while post-money valuation reflects the overall value of the startup, considering the new investment. Balancing these valuations is a pivotal negotiation point, with startups aiming for higher valuations to minimize dilution of existing ownership and investors seeking lower valuations to secure larger ownership percentages.
• Anti-Dilution Provisions: Anti-dilution provisions are paramount in protecting the interests of investors. This clause ensures that if the company issues additional shares at a lower price than what the initial investor paid, the investor’s ownership percentage is adjusted. This mechanism safeguards the investor’s stake and maintains a fair value for their investment. In essence, it acts as a safety net against potential equity dilution.
• Conversion Terms: Convertible securities, such as convertible notes, are common forms of investment in startups. Conversion terms in the agreement lay out the conditions under which these securities convert into equity shares. These terms include the conversion price, triggering events (like subsequent funding rounds), and any adjustments due to anti-dilution provisions.
• Liquidation Preference: The liquidation preference clause outlines the order in which distributions are made during a company's liquidation event, such as a sale or winding down. Investors with a liquidation preference are entitled to receive a specified amount before other shareholders. This can significantly impact the distribution of proceeds and is a critical factor for investors to consider.
• Founders Lock-In Period: Founders are the heart of any startup, and to ensure their dedication to the company's success, the founders lock-in period clause is crucial. This clause stipulates a specific period during which founders are restricted from selling or transferring their shares. It aligns the interests of founders with the long-term success of the company, giving investors peace of mind.

How Water and Shark Legal can help

Navigating the complexities of Investment Agreements can be daunting, and that is where our team of international corporate lawyers are here to assist you. Our team specializes in crafting Investment Agreements that protect your interests across all regions. Contact us for more information on how we can help you secure successful investments and safeguard your startup's future.