Before the transaction is actually concluded, you need to sign an investment agreement. In it are all the fundamental agreements of all parties of the transaction, that are: the investor, the contractor, and the customer. Such a document, which describes the mechanisms for investing in business, primarily includes the details of the funding process, the obligations, and rights of all parties of the contract, the features of the management system and ways to resolve alleged conflicts. That is, such a document is essentially a step-by-step instruction, an algorithm of execution of all stages of the project, which should be adhered to by all parties to the contract. In addition, the investment process must be accompanied by an additional package of documents, including: the charter, loan agreements, the necessary licensing permits, etc.
Properly executed investment contract, the sample of which is specified in article 9 of the Law of Ukraine «On investment activity», is itself the legal agreement between the investor and the customer. It is considered the main document, because the investment code, which would define the economic, organizational, and legal basis of investment activity in Ukraine, does not yet exist. Also, if the need arises, one can use the decision of the Cabinet of Ministers of Ukraine 112 «On approval of the Regulation on the procedure of state registration of contracts on joint investment activity with the participation of a foreign investor». It is important to note that such an investment document should be drafted by a lawyer who practices and knows its main features.
The main concepts from investment field
The customer is the head (or owner) of the company. He is responsible for the financing provided by the investor, as well as for the fulfillment of all obligations specified in the investment agreement.
An investor is an individual or a legal person who invests personal money into the necessary financial instruments. The purpose of such an investment is to obtain income. Certain funds may also be investors.
The expert review of a project for investment is designed to determine its effectiveness and perceived risk. Different mathematical models are used in this examination. They allow one to determine the optimal amount of investment, payback period of the investment project, its profitability (also profitability index) and other financial and production components.
A memorandum (special agreement) of intent, which concludes by the future parties to the project, is preceding the signing of the investment treaty. In essence, it is a text of oral agreements reached and accepted by all sides. This document is signed even before the establishment of a legal entity or the start of the investment project. Among other things, the memorandum specifies who the project participants are, their obligations and possible penalties (fines). As a rule, however, the memorandum has no legal force in the event of litigation.
The drawing up of an investment treaty requires substantial participation of all its subjects. It is advisable that everyone involves their lawyer to protect their interests.
The main terms of the investment contract
The contract must specify:
- Its subject;
- Objectives of the partnership;
- Who and to what extent manages the company and makes decisions;
- Amount and income interim period;
- Purpose and conditions of acceptance of new partners;
- Conditions of entry of other investors;
- Withdrawal terms.
The investment contract often comes with two more binding documents – the charter and employment contracts.
The charter, or corporate agreement, governs the relations between the parties and also defines four main mechanisms for the implementation of the project:
- Decision-making mechanisms on increasing the authorized capital. After all, in case the customer unilaterally increases the authorized capital, the investor faces the loss of virtually all dividends;
- Decision-making conditions for substantial operations. It is assumed that these are amounts from half of the value of the company or the amount of its authorized capital. The size of such sums is recorded;
- Allocation of dividends between investors: how much, when and how often they receive dividends;
- Appointment of a Director General and a Chief Accountant (such may be the Chief Financial Officer). An algorithm and procedures are prescribed, who elects the executives, what percentage of votes is needed, how often, etc.
Employment contracts form the legal basis for the company’s activities. We advise for a contract of employment without a term and with maximum flexibility. A document is required, in which it will be prohibited to dismiss employees unilaterally (one partner). At the same time, it leave one the right to withdraw quickly from the agreement while preserving their interests.
What does the investor receive?
The investor receives primarily direct income in the form of fixed or one-time financial payments. He is also entitled to a share in the company with or without decision-making power. There are investment projects that allow the investor to make a profit in a short time after investing every month, quarter, or year. There are also projects that are planned to have a yield in years or even decades later.
There are cases when an extremely valuable employee can become a co-owner of the of the company shares. In this case, this person (as a natural person) is introduced as part of the co-founders of the company. There is also a practice of when a bonus is fixed in his employment contract, that is corresponding to the financial indicators of the company.
Forms of investment agreements
There are different types of investment agreements. Usually the following forms are practiced:
- The investor enters the authorized capital, buying shares in the authorized capital or shares. For example, the investor invests in such capital 100 conventional units and as a result gets a share of 10%. This method of investment is quite popular in Ukraine. It is optimal due to the fact that it does not entail additional tax obligations, at the same time guarantees transparent relations between signatories and allows the investor to receive a legitimate profit.
- In Ukraine, among the practical mechanisms of investment registration, a loan agreement is quite frequently used to form relations. The document fully meets the legal environment of the country and gives the opportunity to legally receive income (as interest) from investment in start-ups. But there is one drawback – the volume of investment income from investment in startups in the first stage is limited by the volume of interest. And if the start-up becomes financially profitable in the future, the investor will not be able to increase his profit from ownership of a share in the project.
- Another type of an investment agreement: joint activities. The investor transfers the funds in such activities as an investment and the company provides its employees for the implementation of the project. As a result, all parties will get their share in the joint activities: this could be in the percentage of 20 to 80. This type of relationship is rarely used in Ukraine due to a number of shortcomings. In particular, the form of the relationship involves registration, labor-intensive taxation, and a need to share both the profits from the company’s activities, and its property (tangible values), and even all intellectual property rights in the future.
As you can see, attracting external start-up capital and organizing an effective business are quite hard tasks, and not everyone has enough intellectual and organizational skills to do so. Getting the investor interested is just the beginning. The most important stage of business organization is to effectively interact to maximize profits and at the same time have little problems. Thus, an investor needs to, before risking his own money, to thoroughly study the project and its conditions. In case the project is chosen, monitor the implementation of the project. At the same time, protect yourself as much as possible by writing up unambiguous mechanisms for making profits.
All of the above is of utmost importance for those who want to conclude an investment agreement and invest their money in a new business.