Overview
Investment agreements govern the relationship between companies and their investors. Whether the investment is venture capital into a startup, private equity into a growing company, or strategic investment between established entities, the documentation must address how money goes in, what rights investors receive, and how various outcomes are handled. These agreements are negotiated intensively because they define the terms under which founders and investors will share the company's future.
The investment documentation typically comprises multiple agreements that work together. The term sheet establishes key economic and governance terms. The subscription agreement effects the actual investment. The shareholders' agreement governs ongoing relationships among shareholders. Side letters may grant specific investor rights. Together, these documents create the complete framework for the investor-company relationship.
Investment terms are heavily negotiated because they allocate value across future scenarios. Valuation determines how much of the company investors receive. Liquidation preferences determine who gets paid first in exits. Anti-dilution provisions protect investor percentages. Board seats and veto rights give investors governance voice. Each provision affects the distribution of outcomes, and the balance depends on relative negotiating leverage and market norms.
Key Considerations
Valuation and Structure
Pre-money valuation, investment amount, securities issued, and any structuring (tranches, milestones).
Economic Rights
Liquidation preferences, participation rights, anti-dilution protection, and dividend provisions.
Governance Rights
Board seats, observer rights, information rights, and protective provisions requiring investor consent.
Transfer Restrictions
Lock-ups, rights of first refusal, co-sale rights, and drag-along provisions.
Exit Provisions
IPO rights, redemption, and mechanisms for achieving liquidity.
Founder Provisions
Vesting, founder restrictions, and key person provisions.
Applying the TCL Framework
Technical
- Understanding the business model and growth trajectory
- Assessing technology and IP position
- Evaluating market opportunity and competition
- Reviewing financial projections and assumptions
- Understanding operational requirements
Commercial
- Negotiating valuation and dilution
- Structuring liquidation preferences appropriately
- Balancing governance rights with operational flexibility
- Addressing milestone-based structures
- Planning for future funding rounds
Legal
- Drafting subscription and shareholders agreements
- Structuring securities law compliant offerings
- Creating enforceable protective provisions
- Addressing regulatory requirements (FEMA, SEBI)
- Building dispute resolution mechanisms
"Investment agreements allocate future outcomes between founders and investors. Every term has consequences across the range of scenarios - from stellar success to disappointing exit. Understanding those consequences, not just the terms themselves, is essential to effective negotiation."
Common Pitfalls
Term Sheet Overconfidence
Assuming signed term sheets guarantee closing without understanding conditions and due diligence hurdles.
Preference Stack
Multiple rounds with participating preferences that leave common shareholders with little in modest exits.
Governance Overreach
Protective provisions so broad they prevent normal business operations without investor consent.
Founder Vulnerability
Inadequate vesting protection or excessive founder restrictions that create misaligned incentives.
Down Round Surprise
Anti-dilution provisions with severe consequences that are not appreciated until triggered.
Regulatory Framework
Investment agreements in India operate within multiple regulatory frameworks. FEMA and RBI regulations govern foreign investment including pricing rules, sectoral caps, and reporting requirements. Companies Act provisions affect share issuance, valuation, and shareholder rights. SEBI regulations apply to listed company investments and may affect unlisted companies approaching listing. Stamp duty applies to share transfers and certain agreements. Tax considerations including angel tax provisions affect investment structuring.
Practical Guidance
- Negotiate term sheet provisions carefully - they drive all subsequent documentation.
- Model scenarios to understand how preferences and anti-dilution actually work.
- Balance investor governance rights against operational flexibility needs.
- Ensure founder vesting protects against early departures.
- Plan the capital table for future rounds, not just the current one.
- Engage experienced counsel for documentation and regulatory compliance.
Frequently Asked Questions
Related Practice Areas
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