Key Differences Between an Investment Agreement and a Shareholders’ Agreement

As a startup founder, you will encounter several crucial legal documents as you seek to secure investment and set out your business’s governance structure. You will likely encounter two key documents: the investment agreement and the shareholders’ agreement. Understanding these legal documents can be essential for navigating funding rounds and ensuring your business’s long-term success. While both are essential for structuring the relationship between your company and its investors and shareholders, they serve different purposes and contain distinct terms. For example, the investment agreement focuses on the terms of investment, whereas the shareholders’ agreement focuses on your startup’s long-term governance. This article will further explain the critical differences between these agreements. It will also explore the different legal implications of each and highlight the importance of seeking expert legal advice when drafting these documents. 

1. Purpose and Scope 

The following table outlines the key differences between investment agreements and shareholder agreements regarding their purpose and scope. 

Founders typically draft an investment agreement during funding rounds when seeking capital from investors. You will draft a shareholders’ agreement whenever multiple shareholders are in your company. This agreement helps to ensure smooth governance among numerous stakeholders. You usually draft a shareholders’ agreement during your company’s formation or a significant funding round when you obtain equity investment. 

2. Key Investment Provisions 

These two types of agreements differ significantly in their contents. For example, key provisions of an investment agreement include the following: 

• details of the amount of capital you will receive and the valuation of your company; 
• the type of securities issued, such as equity or convertible notes; 
• the conditions that parties must meet before the investment is complete, such as due diligence; and
• statements from the company and its investors about the condition of the business and the accuracy of the information they have provided. 

Alternatively, key provisions of a shareholders’ agreement include the following: 

• details of voting rights and the process for making significant decisions; 
• the structure of the board of directors; 
• rights of shareholders to appoint or remove directors; 
• the procedures for selling or transferring shares; 
• the company’s policy on the distribution of profit among shareholders; and
• exit guidelines. 

3. Legal Investment Implications 

Both agreements are legally binding and create obligations for the parties involved. An investment agreement, for example, obligates parties to complete the transaction according to the agreed-upon terms. 

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A shareholder agreement requires parties to act as per its terms in their capacity as shareholders in the company. This agreement governs the relationship between shareholders over the long term. It provides stability and clarity in operations. Moreover, the dispute resolution mechanisms within this contract can help prevent costly litigation and unnecessary disruptions to your startup’s operations. 

Seeking expert legal advice when drafting and negotiating these agreements can be critical. Both can contain complex legal provisions that significantly impact your business’s operations and your relationship with investors. A lawyer can:

• help you review the terms, ensure they are fair, and protect your interests;
• clarify your obligations; 
• identify potential risks and help you mitigate them; 
• negotiate with investors and shareholders on your behalf; and
• Tailor the agreements to suit your startup’s specific needs. 

Key Takeaways 

Understanding the differences between an investment agreement and a shareholders’ agreement is essential for any startup founder. With this knowledge, you can navigate the investment process and build a solid foundation for your startup’s growth. Although you may draft them simultaneously, the two documents are distinct. While the investment agreement focuses on the specific terms of the transaction, the shareholders’ agreement governs the ongoing relationship among shareholders and your company’s management. Both documents should protect your interests and ensure clear communication among interested parties.

If you need help drafting an investment agreement or a shareholders’ agreement, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.