Legal documentation of an investment

Legal documentation of investments. So, you are about to receive investment, and you may be sharing certain confidential information with the investor. In that case, we advise you to sign an NDA, a non-disclosure agreement. After that, you move on to signing a term sheet, a so-called preliminary agreement, which sets out the main, basic terms to be agreed between you and the potential investor even before the main agreement is signed. For example, the investor may ask you to record in this document certain terms that were agreed with you in the course of your working discussions.

You can also ask for some of the arrangements to be reflected in such a document even before the main agreement is signed. Next, we move on to investment agreements. And one of the first types we will look at today is the convertible loan. A convertible loan is a debt instrument: the investor gives you a loan, but this loan can be converted into shares at a predetermined conversion price or at a discount, that is, a discount to the future valuation. A distinctive feature of a convertible loan is the valuation cap, that is, the maximum valuation of your business.

There may also be terms on the interest rate, the maturity date and other aspects. As a rule, convertible loans are issued at the pre-seed and seed stages. The next type is the SAFE, Simple Agreement for Future Equity, which, as I pointed out earlier, was developed by Y Combinator. It should be noted that under a SAFE the loan is converted into shares when a certain event occurs. However, what sets this agreement apart is that the loan has no term and no interest rate. And this agreement was developed by Y Combinator specifically for the convenience of startups.

The next type of investment agreement is KISS, Keep It Simple Security. This agreement was developed by 500 Startups to simplify the investment process and to reduce the amount of negotiation over documentation. What distinguishes it? First of all, flexibility in structuring the terms. Second, it has a maturity date. The maturity date is 18 months. In addition, there is conversion into shares at the cap or receiving payment of interest and the principal. It should also be noted that investors have no voting rights or additional rights.

And now we move on to the final part of the legal documentation of investments. After you have received the investment, you will need to make changes in the relevant registers and go through the corresponding re-registration; or, if you are setting up a startup and are already receiving investment, you will accordingly need to describe all these points and notify the relevant authorities. For example, you can go to the so-called TsONs, the Public Service Centers, which are now called “Government for Citizens”, and record there all the relevant changes that have taken place in your company. You will also need to change the relevant documents, for example, the founding agreements.