Key terms of the Investment Agreement

Parties
Existing shareholders and the company
All the existing shareholders (and in particular the founders) and the
company should be a party to the agreement, although it may not be
practical for all minority shareholders to be a party if there are a large
number of them.
Investors

As the investment agreement deals with the

subscription for shares by the investors in return for the investment
monies, the investment agreement should bind all investors participating,
including any separate funds that are investing.
Future shareholders
It is usual to have a provision requiring any transferee or new allottee of
shares to enter into a deed of adherence which has the effect of treating
the new shareholder as if he were an original party to the investment
agreement and therefore bound by the provisions of the agreement.
There is often a discretion for the board to waive this requirement and an
exclusion for those exercising options.
Tranche payments
It is common in investments in life sciences companies for payments to
be tranched, each such tranche being measured against the
achievement of agreed milestones. Usually these milestones are
measured against, for instance, the different stages of development of
one or more products, the company agreeing to take on new
developments or the results of pre-clinical or clinical trials. It is common
for the investors to be able to waive milestones or other completion
conditions in the event that these are not achieved.
Completion conditions – initial tranche
The investors will stipulate that certain conditions must be satisfied
before the initial tranche of the investment can proceed to completion.
These conditions may include the following:

 completion of any necessary due diligence in respect of the

company;
 the delivery of a satisfactory business plan and management
accounts;
  obtaining any required tax clearances;
 having the necessary authorities (board and shareholder) in place
to issue the new shares to investors as part of the investment and
adopting the new articles of association. This will likely require the
passing of shareholder resolutions (whether by written resolution
or by the holding of a general meeting) which may impact when
the investment can be completed, depending how quickly these
resolutions can be passed;
 the founders and key management having being issued shares or
options;
 the assignment in full of necessary intellectual property rights
owned by the founders or other persons to the company; and
 appropriate insurance, such as keyman and directors' and officers'
liability insurance, being put in place.

Initial tranche completion mechanics

These are the actions that need to be taken on the completion of the
initial tranche of investment:

 approval of the investment agreement and if applicable disclosure

letter;
 issue of subscription shares and related certificates to the
investors;
 appointment of the investor director(s) to the board of directors;
 an obligation on the investors to pay the subscription monies to the
company's bank account;
 approval and execution of service agreements if the founders are
to become executive directors of the company; and
 adoption of or commitment to adopt a share option plan.

The investment agreement will stipulate that the proceeds of the

investment (whether on the initial or subsequent tranches) must be used
for achieving the agreed milestones and the realisation of the agreed
business plan or budget.
Completion conditions – subsequent tranches
It is typical for completion conditions to be attached to each subsequent
tranche of investment. These would commonly include:

 completion of the initial investment/previous tranche occurring;

 no material adverse change occurring (i.e. a negative event which
impacts significantly on the business the result of which may
otherwise effect an investor's willingness to invest in a company);
 the achievement of the agreed milestones related to the tranche in
question;
 there being no material breach of the investment agreement, the
new articles of association or a director's service agreement;
 the continuing employment by the company of the founders/certain
key employees; and
 the company not having entered into an insolvency event.

Subsequent tranche completion mechanics

These are the actions that need to be taken on the completion of the
subsequent tranches of investment:

 issue of new shares and related certificates to the investors; and

 an obligation on the investors to pay the subscription monies to the
company's bank accounts.

Warranties

Warranties are representations made by

the warrantors, who are usually the founders and the company, that
certain statements relating to the company are true and accurate at the
completion date. Although the investors will have carried out due
diligence on the company and pursuant to common law would have a
right to sue the founders for misrepresentation if information provided
was inaccurate, the investors will prefer such statements to be expressly
included in the contract.
The warranties are given at completion of an initial tranche and
sometimes on the completion of subsequent tranches. If prior to
completion of a tranche, any of the warranties given by the warrantors
are in fact untrue, this gives the investors a right in contract to sue the
warrantors for breach of warranty.  The warrantors can qualify the
warranties by way of a disclosure letter and agree in the investment
agreement any limitations to the warranties (for example, time
limitations, materiality threshold and financial limitations on a claim
(which, for a founder is usually linked to a multiple of his salary and for
the company, is usually the full value of the investment)).
If the investment is in a start-up life sciences company, save for the IP
warranties, the remaining warranties will be fairly limited in their
application due to the company's limited trading history. IP warranties in
life sciences investments, whatever the stage of the company, are more
often than not more detailed and larger in scope than other warranties,
due to the value, scope and complexity of the IP that they own or
products that they are aiming to create and/or develop. Warranties will
likely be even more extensive if a life sciences company is going through
a second or later round of investment.
Other examples of typical warranties include the following:

 business plan;
 shares and constitution of the company;
 liabilities and contracts;
 directors and employees; and
 tax (particular for life sciences companies that are not involved in
their first round of investment).

Investor consent regime

The investors will usually have a minority interest, i.e. they will together
be holding less than 50% of shares in the company on completion of an
initial investment. However, historically it is not uncommon for investors
in life sciences companies to quickly hold a majority interest, particularly
if the company requires more than one round of investment, due to the
size of each investment and the amount of money that is often needed
to develop a life sciences company's product(s). Under English company
law, many shareholder matters can be passed by either a majority of
shareholders or by at least 75% of shareholders.
The investors will want a contractual right to prevent shareholders taking
key decisions without their consent. This applies to management
decisions as well as shareholder decisions, such as:

 varying the rights attaching to the shares;

 the issuing or granting of options over the company's securities;
 adopting new articles of association;
 removing or appointing a director;
  making a material change in the nature of the business of the
company;
 acquiring any shares or other securities;
 making any changes in the service agreements;
 entering into unbudgeted capital expenditure exceeding a certain
amount;
 entering into any litigation;
 incorporating a new subsidiary; and
 disposing of any assets (in particular IP) of the company other than
in the ordinary course of business.

The level of consent is very much dependent on how many investors are
investing in the company. If there is only one investor, then it is usual to
state that none of the matters listed above can be taken without the prior
approval of that investor. However, where there is a consortium of
investors it is impracticable and time consuming to require the consent of
every single investor before any shareholder matter or board matter is
undertaken. In these circumstances it is much more usual to require the
consent of the investors together holding a certain percentage of shares
(which are usually preferred shares – see below) held by the investors.
Financial information

It is often a requirement that, when they bring an

institutional investor on board, management have to produce
management accounts, audited accounts and financial models and
budgets for the upcoming financial years which they have to deliver to
investors prior to certain dates. This can be burdensome for
management to produce.  In addition, the investors are likely to require
that they can access on request the accounts of the company for
inspection. 
Board representation
In most cases investors in life sciences companies are likely to require
that they are able to have an entrenched right to appoint a director and
that a majority, if not all, of the directors appointed by the investors need
to be present in order for there to be a quorum of any meeting of the
board to allow business to proceed. An investor director can contribute
his know how and expertise in the industry.  Founders may also have an
entrenched right to appoint a director.  In some cases, investors may
look for `observer rights' so that they have the right to send non-directors
to sit in and observe board meetings and to receive board papers, but
not to vote. Whilst board representation is to be expected, it can prove
unwieldy if a company has gone through several rounds of investment
with new institutions collecting new board members at each round.
There are rules under company law with regard to conflicts of interest of
directors and the investor director will need to declare any of his
interests in the investor he represents such as being entitled to a bonus
or carried interest if the fund is successful or directorships in competing
companies which the board can then authorise. 
Restrictive covenants
The purpose of restrictive covenants or non-competes is to prevent the
founders from competing with the business of the company whilst, and
when they cease to be, involved with the company. Typically, restrictive
covenants will be found in the service agreement as well as the
investment agreement.  However, restrictive covenants in the investment
agreement are generally more enforceable than those in the service
agreement, as the founders are giving the covenants as shareholders
(not employees) in part consideration for the investment.
Exit
There may be a provision in the investment agreement which states the
parties' intention to work towards an exit, for example a listing of the
company on a recognised stock exchange or a sale of the company,
within a specified period of time (usually 3 to 5 years). Coupled with that
intention is generally an acknowledgement that an investor will not give
any warranties or indemnities regarding the business and affairs of the
company on an exit, other than warranties relating to its capacity to sell
its shares.
Confidentiality
There will be a provision in the agreement to ensure that its parties will
keep all confidential information confidential. Normally, an investor is
expressly allowed to disclose information to its employees, members,
participants etc.
Costs
The company usually pays for the investors' reasonable legal and due
diligence fees or a proportion of such fees as well as its own costs and
sometimes those of the founders.
Other matters to note
 Certain investors in life sciences companies may
require the company and the founders to enter into specific undertakings
or requirements as part of their investment, particularly if they are
charitable entities or have a particular social focus or aim. These will
need to be considered carefully when negotiating the term sheet and the
definitive legal documents as a breach of them can often have serious
consequences for both an investor and the company e.g. for instance a
need for that investor to sell its shares or to not provide further funds in
subsequent tranches of investment.