Web, Mobile Application or Software Company Investment Agreement | Law&Trust International

Funding or finance is an important part of any project, A monetary asset purchased today with the idea that it will provide profit in the future at a higher price is known as Investment. Investing in the development of a project improves the efficiency of a product and expand its capabilities, but also attracts a team of competent marketers, whose work will increase the popularity and speed up the returns of the product.

Regulation Of Relations Between Investor, Partners And Team

Competently executed relationships between the investor and the project team will help avoid possible misunderstandings in the implementation of further tasks on products, delimiting and securing the scope of activities (a software company investor agreement).

Lawyers of Law and Trust International assist you in building your relationship, preparing and concluding an agreement with an investor to protect your rights when investing, and those of the team members, especially if you decide to continue or end your relationship with an investor.

Venture Capital Investment Agreement

Even in the second decade of the twentieth century, investing in IT products are termed ‘high risk’, as not every project becomes the ‘modern-day Google’ or the ‘new Facebook’. Many investors, however, enter into an investment contract in IT, investing in IT projects, ranging from applications for smartphones to the development of nanotechnology, with the expectation that the project will yield profits or dividends some day.

At the same time, investors should protect themselves as much as possible, protect their interests when investing in a startup, while structuring a deal and agreeing to contracts (startup investor agreement). There are many ways to raise funds and, “investment contracts” alike.

Loan Investment Agreement: Execution of a Contract

Common Loan

A convertible loan is an agreement whereby an investor provides his money to a company, and the company, in turn, plans not to return the amount of the debt, but to “pay off” the creditor with shares or other securities of the issuing company.

The loan is a traditional instrument of raising funds, where the company finds a person who agrees on certain conditions (term and interest) and, under specific collateral, lends the company a certain amount of money.

It worth noting that banks often agree to issue a loan (credit) to a company (of course, after studying it in detail) on the security of a share in this company. Thus, until the repayment of the loan amount and interest, the bank will hold the shares or shares the company pledged. In some jurisdictions, the mortgagee acquires the same rights as a shareholder or participant for the term of holding shares or stocks in a pledge (for example, a promise of a share in a Russian LLC). This feature makes a conventional loan in some way similar to a convertible loan.

Convertible Loan

The investor’s interest in this case is that by investing certain funds at an early stage in the company, he can receive, under the terms of the agreement, shares (or other securities) in an expensive company and thus make profit in the form of dividends distributed to him or selling share at market price.

However, there is always a situation in which the assessment of the company’s potential varies: an investor can claim that the potential of the company is US$5,000,000 and the company’s founders - US$20,000,000. Since, unfortunately, there is no universal tool for determining (estimating) the potential value of a company at a very early stage of its life cycle, the negotiation process boils down to ordinary banal bargaining which may lead to nothing for both the investor and team.

To avoid this kind of situation, it is important to protect the rights and interests of the investor, it is possible to structure the transaction in the form of a convertible loan. In this case, the actual value of the company will determine the market value represented by the investors for the next investment (for example, IPO, public offering of securities). In most cases, the evaluation result suits both parties. To compensate for the risks of an early investor, which creates certain advantages for him over other investors (subsequent stages in the process of structuring transactions along the path of convertible loans), various methods are used, the most important being Maturity Date, Discount and Valuation Cap.

Maturity Date is a condition that sets a time during which the next investment must occur. If a new series of investment does not happen, then, according to the terms of the contract, the condition “Conversion on Maturity” is triggered.

Conversion on Maturity is usually in one of these three forms: postponement of the next investment, returning a loan with interest, and compulsory conversion into shares under the terms of the Maturity Cap - for example, a company sells 50% of its shares to an investor.

If the next round of investment takes place, then, according to the terms of the contract, the debt can be repaid, provided that such liability is converting into the company’s securities. In this case, the remaining two parameters - either Valuation or Cap Discount.

Valuation Cap regulates the highest, maximum, estimate according to the investor and startup, which can be used to determine the price of converting a loan into a company share.

The contract of a convertible loan, in which there is no Valuation Cap is hazardous and a high-risk for potential investors. In this case, if there is a significant increase in the company’s valuation (for example, on an IPO), the investor may not receive substantial benefits from this.

Imagine a scenario where the initial investor deposited or invested US$500,000 under the convertible loan agreement in a company that has quickly become self-sufficient and did not invest further for a long period of time. What these states are that the company raised cash from a new investor in the amount of US$5 million, with a company valuation of US$20 million. Thus, this is a situation that a new investor who is not at risk of losing the investment in full receives 25% of the shares (5,000,000 / 20,000,000 = 0.25), and the initial investor who believed in the team at the stage of building the project is only 2,5% (500,000 / 20,000,000 = 0.025). There is a Valuation Cap to avoid this situation.

If the investor and the company agree on a Valuation Cap of US$5 million, the company is estimated at US$20 million, an investor would receive a share based on the present Valuation Cap of US$5 million, and not the estimated price of US$20 million. Thus, the initial investor could convert his loan into 10% of the company’s shares (500,000 / 5,000,000 = 0.1), rather than 2.5%, as described above.

However, if the company’s valuation is lower than the fixed value in the Valuation Cap, the investor can receive a discount at a further level, when raising funds. If a new investor owns a company’s securities for €10 per unit, but a converted loan agreement is concluded between the company and the initial investor with a 20% discount, then the initial investor can turn his loan into the same securities. However, the return is measured by the price of €80 per unit, thus obtaining more shares and realizing their rights as an early investor.

When drafting a convertible loan agreement, the following conditions should be taken into account:

  • Qualified Financing (which is considered an investment round and what is not);
  • Most favoured nation (the method by which a company agrees to provide the investor with the best conditions that the company offers to any other investor (limited discount and valuation cap).

Joint Venture Investment Agreement: Contract Execution

A joint venture is a business agreement where two or more parties agree to pool their resources for a specific task. This task can either be a new project or the pooling of efforts of two already existing market players for the realization of some business goal. In a joint venture, where the relationship between the investor and the project is regulated, each of the participants (no matter the investor or developer) is responsible for profits, losses and related expenses in proportion to their shares in this enterprise. However, the enterprise is its organization, separate from the other business interests of the participants.

Although joint ventures are an ordinary partnership in the general sense of the word, joint ventures can have any legal structure and be created in any jurisdiction based on the needs of the investor or developer. Corporations, partnerships, Limited Liability Companies (LLC) and other commercial organizations can be used to create a joint venture.

Regardless of the legal structure used for the joint venture, the most important document will be an agreement to establish a joint venture, which sets out all the rights and obligations of the partners (both team members and the investor).

This document usually outlines:

  • The goals of a joint venture,
  • Initial contributions of partners,
  • List of daily (ordinary) operations, which may not require the consent of the board of directors/shareholders,
  • Issues for which the consent is necessary (how the Joint Venture will be monitored, managed and so on).

It is crucial to entrust the creation of a joint venture, including the preparation of a charter, a shareholder agreement, a joint venture agreement and other legally relevant documents to professionals, to avoid future court proceedings.

Choice of Jurisdiction for Joint Venture

When choosing a jurisdiction for the incorporation of a joint venture, it is necessary to consider certain factors, they include:

  • View of the company’s activities;
  • Geography of the company;
  • Country investors;
  • Tax burden and political situation.

This means that if the type of activity and geography of activity are aimed exclusively at any one country, then naturally, the most convenient and most straightforward option would be to create a company in the target country. When choosing a jurisdiction for a Joint Venture, always take into account tax issues that may arise. It is necessary to examine how and at what rates profits, dividends, royalties, value-added tax are levied in a given jurisdiction, are there any tax breaks for IT companies. It is imperative to consider the list and mechanism for the application of agreements on the avoidance of double taxation.

When choosing a jurisdiction to create a joint venture, protect your interests and the interests of the investor(that is between company and individual), you must select the one that will be both politically and economically stable. An unfavourable regime change or the collapse of the financial system can seriously interfere with your business and adversely affect your company and, possibly, complicate settlements with counterparties, which may entail the imposition of penalties on the part of such counterparties.

Why Law & Trust International?

  • Lawyers of Law and Trust have been providing investment and other transaction support services since 2003.
  • Our experts make sure you are protected from any possible violation of your rights,
  • Competently structure and conduct a transaction with the most beneficial result for you.

Law and Trust International offers a wide range of services in the field of IT (including IT business investments). For each case, we select the most optimal strategy plan that will help develop your business in the IT sector and acquire new opportunities.

For more detailed information about our legal support system, please contact Law & Trust International by simply sending an email or call now to take your business to the next level!

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