Reviewing an Investment Agreement: Practical Points for the Issuer and Founding Shareholders

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

Once a Series A round gets moving and the lead investor candidate firms up, a full set of draft investment agreements arrives from the investor's counsel. It often comes together with a shareholders' agreement, a distribution agreement and the terms of the class shares (an appendix to the articles of incorporation), and my impression is that founders receiving drafts of this volume for the first time are struck first by their sheer thickness.

As you read through the investment agreement, you may notice that the parties include not only the issuing company but also the founder in an individual capacity. Adding the founder as a party is a common practice, but it is not a legal requirement. Even if it seems natural for the company to be a party to the financing, many founders wonder why they personally must sign as a contracting party and take on heavy obligations. I think that the position of this party, the "founding shareholder" (keiei kabunushi), is the first hurdle in making sense of an investment agreement.

In practice, negotiation of an investment agreement revolves around two provisions: the representations and warranties and the share buyback right (put option). In particular, how far the burden on the founding shareholder as an individual extends is an issue that affects the founder's life and life planning after the financing, and it is an area where the issuer and the founding shareholder will want to deliberate carefully.

Below, I review the investment agreement from the perspective of both the issuer and the founding shareholder and go through the negotiating points in turn: the payment procedure, representations and warranties, the share buyback right and damages. If you need a review that cuts across the investment agreement, the shareholders' agreement, the distribution agreement and the terms of the class shares, please see the scope and fees of our startup legal and financing support for issuers.

The Role of the Investment Agreement and the Payment Procedure

An investment agreement sets out the procedures and conditions through which an investor subscribes for new shares of the issuer and makes payment. It typically fixes the issue terms, such as the number of shares subscribed, the amount paid in and the payment date, and also provides for the conditions precedent to the investor's payment, the representations and warranties of the issuer and the founding shareholder, and the remedies available if the agreement is breached.

The point to keep in mind is that the investment agreement mainly covers the phase up to completion of payment. Indemnification for breach of representations and warranties and similar provisions survive for the period stated in the agreement after payment. On the other hand, what rights the investor will have as a shareholder after payment is completed, and how it will be involved in the management of the company, are left to the shareholders' agreement, which is executed separately. I cover the shareholders' agreement in Reviewing a Shareholders' Agreement: Prior Consent Matters, Information Rights and the Founding Shareholder's Obligations.

When reading the investment agreement, check together with the shareholders' agreement, the appendix to the articles of incorporation and the other documents which document provides for what. Once you understand the division of roles, it becomes easier to notice that the same issue is dealt with in another document as well. I give an overview in What Is Financing Through Class Shares (Preferred Shares)? An Overview of Series A Agreements and Procedures, and if you are working on a Series A for the first time, I recommend reading that first.

At the beginning of the agreement, it is provided that the issuer will issue preferred shares to the investor and that the investor will subscribe for and pay for them. In practice, the agreement sometimes states that it "also serves as a total share subscription agreement," but rather than relying on whether that one sentence is present, check whether, in substance, the subscription for the total number of the offered shares has been agreed. If the total share subscription agreement method under Article 205 of the Companies Act is used, the individual application and allotment procedures under Articles 203 and 204 of the Companies Act can be omitted. However, the determination of the offering terms itself cannot be omitted, and for shares with transfer restrictions, approval of the agreement by the shareholders' meeting or the board of directors is required as a rule (Article 205, paragraph 2 of the Companies Act). If the total subscription method is not used, check that the statutory application and allotment procedures will proceed as scheduled. Also confirm that the payment date or payment period is consistent with the issuance resolution of the shareholders' meeting or other body.

What the issuer will want to design carefully are the conditions precedent (CPs) to payment. Conditions precedent are the conditions on which the investor becomes obliged to make payment, and they include the accuracy of the representations and warranties, the performance of contractual obligations, and the delivery of required documents. What to keep in mind here is to clearly distinguish between conditions that the parties can waive by agreement, mandatory procedures that cannot be omitted under law (such as the prescribed corporate resolutions), and the grounds for terminating the agreement. If the conditions precedent are broad or the criteria for satisfying them are vague, the investor may claim that a condition has not been met, and the timing of the funds arriving may become unpredictable. As the issuer, negotiate to narrow them down to conditions whose satisfaction can be determined by objective facts or by whether documents exist.

Limiting the Representations and Warranties and Disclosure Schedules

One of the core provisions of an investment agreement is the representations and warranties. Representations and warranties confirm in the agreement the facts on which the investment decision was based, and complement the prior due diligence. It is a mechanism widely used in corporate transactions in general, including M&A, and is not limited to investment agreements. The subject matter ranges widely, from the company's due incorporation and valid existence to the accuracy of its financial statements, ownership of intellectual property rights and legal compliance.

From the issuer's point of view, what matters is not to accept the proposed representations and warranties unconditionally but to limit their scope. Startups in particular often have internal management systems that are still being built, so the company negotiates to insert appropriate knowledge qualifiers such as "to the knowledge of" (including whether this covers a reasonable inquiry) and materiality qualifiers such as "in all material respects." Also check the contract language on the reference date, that is, as of when the facts are warranted (the date of execution, the payment date and so on).

Another practical technique is disclosure of exceptions in schedules. The body of the representations and warranties states the general principle, and where there are facts that do not fit it, those facts are described specifically in a schedule and disclosed, which keeps the representations and warranties as a whole accurate. For example, if the litigation provision states that "there is no material dispute" but the company is currently dealing with a dispute, the details are set out in a schedule, and the body of the agreement provides that the scheduled matter is an exception to that representation and warranty.

The agreement should make clear which item in the schedule is an exception to which representation and warranty. Also check consistency with the materials disclosed in due diligence. Merely submitting materials to a data room or the like at the due diligence stage does not by itself automatically release the company from contractual liability. If the disclosed materials and the schedule are inconsistent, this may later invite doubts as to whether adequate disclosure was made, so cross-check them carefully. I explain the materials to submit to investors in Series A due diligence in Preparing for Legal DD in a Series A.

Representations and warranties given by the founding shareholder personally, on the other hand, must be considered clearly separately from those of the issuer. Investor drafts sometimes have the founder personally warranting, without any limitation, even matters relating to the issuer's business and finances. However, having an individual give an unlimited warranty extending even to the legality of the company's financial statements tends to be an excessive burden.

The public guidance prepared by the Ministry of Economy, Trade and Industry (the September 2025 expanded edition of "Main Points to Note in Contracts for Sound Venture Investment in Japan") also indicates a direction of removing individuals as parties giving representations and warranties, from the standpoint of separating the corporation from the individual and of appropriate governance. This guidance is not a mandatory law that automatically negates the effect of private contracts, but it is a strong basis in negotiations to curb unreasonably heavy personal burdens. Even where it is difficult to remove the personal representations and warranties, adjust them so that they are limited to matters specific to the founder as an individual, such as eligibility and conflicts of interest, or so that matters relating to the company are subject to a "to the knowledge of" qualifier. Matters specific to the individual, such as the exclusion of anti-social forces, can also be addressed individually in a side letter or the like as necessary.

Also check the definition of "founding shareholder" itself. If it includes not only the founder personally but also a corporation such as an asset management company, various restrictions may extend to the shares held by that corporation, so do not overlook the reach of the definition.

The Share Buyback Right and Where Liability Lies

The share buyback right is the remedy provision in an investment agreement that founders will want to consider most carefully. It is a right based on contractual agreement and is different in nature from the dissenting shareholders' appraisal right provided for in the Companies Act. It is a mechanism under which the investor can demand that the issuer or the founding shareholder buy back its shares on grounds such as breach of contract, breach of representations and warranties, or failure to satisfy the conditions precedent to payment.

For the issuer and the founding shareholder, the starting point is to consider whether the buyback right itself can be avoided. The METI guidance mentioned above also sets out a direction of responding in line with the company's governance and of curbing the pursuit of individuals' liability. Even if the right cannot be avoided, put the following measures at the center of the negotiations.

First, limit the breaches that trigger a demand to "material breaches." Specify the subject of the breach concretely and prevent the buyback right from being exercised for minor formal breaches or trivial discrepancies in figures. Also negotiate qualifying language such as a cure period or a grace period after notice during which a breach can be remedied, and limiting the trigger to breaches caused by willful misconduct or gross negligence.

Second, ask for the deletion of any provision that makes failure to achieve a stock listing itself a buyback trigger. A listing is an uncertain goal that also depends on the business environment, and treating the failure to list as if it were a breach of contract and requiring a buyback imposes an excessive burden on the founding shareholder.

Third, set the method for calculating the buyback price objectively in advance. Agree whether it will be based on the original acquisition price, on net assets, or on a valuation by a third party. If a third-party valuation is used, unless the agreement also sets out the procedure for selecting the appraiser and how the costs are borne, a dispute over the price may drag on.

Fourth, remove the founding shareholder personally as a party obliged to buy back. A buyback of shares requires a large amount of money, and imposing a buyback obligation on the founder personally could lead to personal bankruptcy. The METI guidance also takes as a basic position that individuals should be excluded from the buyback obligation, and the desirable approach is to draw the line so that individual liability is considered only in extremely exceptional cases involving serious breaches of trust such as fraud or embezzlement. Aggravating provisions such as an obligation to make up the price difference or an obligation to transfer shares for no consideration also impose an excessive burden on the individual, so ask for their deletion.

Fifth, even if the issuer is made the party buying back, it is necessary to understand the source-of-funds restrictions and procedures under the Companies Act. When the company acquires its own shares as treasury shares, it must carry out the acquisition resolution and the procedure for acquisition from specific shareholders under Articles 155, 156, 160 and other provisions of the Companies Act, and it can make the buyback only within the distributable amount under Article 461 of the Companies Act. Simply moving the obligation to the company does not put it in a position to buy back unconditionally. On the tax side as well, the portion of the acquisition price exceeding the amount of stated capital and similar items corresponding to the shares may be taxed as a "deemed dividend." The entire amount is not necessarily taxed uniformly as a dividend, and tax does not always arise in every case, but for the practicalities of acquiring treasury shares, consult a tax accountant in advance and finalize the provisions while checking the impact.

Adjusting Damages and Remedy Provisions

For the damages provision applicable in case of breach of contract, too, the central question is how to keep the founding shareholder's personal burden within an appropriate range.

Investor drafts often provide that the issuer and the founding shareholder are jointly and severally liable for damages. However, if an individual is jointly and severally liable for damages arising from the business activities of the company as a whole, the individual takes on liability far exceeding the scale of his or her personal assets. Try either to delete the joint and several liability provision itself, or to limit the events giving rise to damages, set a cap on the amount of damages, and set a time limit for claims.

Another issue in damages is the treatment of a sandbagging clause. Sandbagging refers to conduct in which an investor, while aware in advance, at the time of execution or before payment, of facts constituting a breach of representations and warranties or the like, deliberately makes the payment without raising them and then demands damages or a share buyback on the grounds of that breach. Which party bears liability for known facts is a matter of contractual risk allocation and is not conduct that is automatically prohibited by law. For that reason, it makes for a fair transaction for the issuer to ask for a provision (an anti-sandbagging provision) stating that it is not liable for facts of which the investor was aware at the time of payment.

Further, if the founding shareholder pays a debt owed jointly and severally with the company and thereby obtains a common discharge, the question arises whether he or she can seek reimbursement from the company in accordance with their internal shares of the burden. Where the founding shareholder has merely performed his or her own individual obligation, a right of reimbursement against the company does not automatically arise. Some drafts include a provision subordinating the founding shareholder's exercise of the right of reimbursement against the company until all obligations to the investor have been performed. Where a subordination provision is included, it is useful to check what range of debts it covers and until when exercise is restricted.

Other Practical Provisions and Points to Note

In addition to the representations and warranties and remedy provisions, an investment agreement contains provisions that affect management practice after the financing.

The use of proceeds provision specifies how the money raised will be used. Adjust the wording by comparing it with your business plan and funding needs, within a range that does not hinder flexible business operations.

The exit efforts obligation is a provision under which the parties agree to make good-faith efforts toward a future stock listing or M&A. As noted in the METI guidance (September 2025 expanded edition, pp. 37–38), this provision is not an obligation that legally guarantees the outcome of a listing itself; it signifies confirmation of mutual cooperation, including M&A and secondary transactions, in light of the fund's term. It cannot be said that an efforts obligation has no effect whatsoever simply because it is an efforts obligation, but it is important to determine whether the provision goes beyond the framework of an efforts obligation and compels a specific sale procedure, or whether it is directly linked to the triggers of the share buyback right discussed above.

Also check the provision on termination upon listing. It is customary to provide that all or part of the investment agreement terminates upon a stock listing, but be clear about which provisions, such as confidentiality, survive after the listing.

A most-favored-nation clause (MFN clause) requires that, if more favorable terms are granted to other investors in a subsequent round, equivalent treatment be given to the investor in this round as well. If the definition of what counts as more favorable, the conditions for comparison and the scope of exclusions are left vague, it becomes difficult in later financings to coordinate the different terms of each investor.

Also, where multiple investors participate in the investment agreement, it is customary to include a definition of "Majority Investors." This refers to the group whose consent is required to amend the agreement or waive rights. The threshold for the majority investors is defined by a number of shares or a percentage of voting rights specified in the agreement, and in some cases a particular lead investor alone suffices, while in others the combined holdings of multiple investors are required. It does not always refer to a single investor holding a majority of voting rights, so before execution, understand whose consent will be required in light of your capital policy.

I also discuss in detail what the individual terms in an investment agreement mean as management decisions in Clauses Founders Should Review as Business Decisions in a Preferred Share Investment Agreement.

Frequently asked questions

Why does the founder personally become a party to the investment agreement?

Because investors often require not only the company but also the founding shareholders personally to assume obligations such as representations and warranties and responding to share buyback demands. How far the scope of the obligations borne by individuals can be limited is an important negotiating point for the issuer side.

How far can representations and warranties be limited?

Methods include subjective qualifiers such as "to the knowledge of" or "to the extent it could have known," materiality qualifiers, and exclusions based on disclosed materials. In particular, for representations and warranties given personally by founding shareholders, it is likely reasonable to negotiate toward narrowing their scope.

What is a share buyback right?

It is a clause providing that, in the event of a breach of representations and warranties, a material breach of contract or similar, the investor may require the founding shareholders or others to purchase its shares. The scope of the triggering events and the method for calculating the purchase price need to be checked carefully.