The investor usually has certain personal rights in the company, affects the shape of the company’s bodies, the right to accept certain decisions. The founders have certain obligations to the investor, in particular information obligations – reports and data that must be prepared and delivered on time. These areas are usually settled in the investment contract or attachments to it.
Similarly, though not always, the issue of relations between several founders and the role of the investor in conflict situations or threats to the company. Even more often, investment agreements ignore the issue of subsequent financing rounds or treat the subject unrealistically because of its apparent distance in time, which in my opinion is one of the most serious deficiencies in transaction documents.
Many of these areas of investor relations enter the legal territory. By anticipating them and describing them, conflicts can be avoided. A well-designed investment agreement is an instruction for both parties. What, however, if the agreement is imprecise or even does not raise a given topic, or despite the good will of both parties, there is a serious difference of opinion. He will describe a few selected examples of such situations, ranging from simple to serious conflicts.
1. Information obligations
In virtually every contract there are clauses obliging the founders and management of the company to provide investors with specific information, usually in the form of reports or even guaranteeing him direct access to them (access to the books, access to the bank account). If the area is not regulated precisely in the contract and there are no specific ways to develop the format, frequency and scope of such reporting, it is not worth postponing their clarification.
The sooner it is fixed, the better it is not only for the good relations of the parties, but above all for the company itself – usually the reports expected by the investor are also crucial for the management of the company. We know cases when the investor for several months did not ask for reports, and how the company fell into liquidity problems, he reported to the founders with a demand for payment of a contractual penalty for each unreported month.
2. Deficiencies in statements and assurances
Each investment agreement includes a block of “Statements and assurances” of the company and the founders. Often so extensive that it is placed in a special annex to the contract. The founders and the company are responsible for their accuracy, in some cases on the “principle of risk”, that is regardless of their knowledge or actions. If it turns out that any of such statements is defective, eg the company “not quite” implemented the system of personal data protection or “not quite” have been transferred copyright to the graphics on the website, it does not mean immediately to bear negative consequences by making statements. Usually (and it is worth taking care of when negotiating a contract), the investor gives time (7-14 days or more, depending on the arrangements) to remedy such defects. Ultimately, the founders may be forced to pay a contractual penalty for such defects or cover the actual costs that the Company will incur as a result of defective statements (eg the need to pay the subcontractor for an additional field of exploitation of the given work).
3. Conflict between the founders or the departure of one of them from the company
The clauses concerning the prohibition of competitive activity, operational exclusivity of the founders and vesting (usually reverse vesting) are aimed mainly at stabilizing the relations between the founders, the investor and the company. Even if working on the business in its initial stages everything looks good, in a large part of the teams something breaks down in the next 2-3 years.