What Is an Investment Agreement? Key Provisions, Differences from the Shareholders' Agreement, and Points for the Issuing Company to Check

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

Once a Series A financing round gets moving, around the time the lead investor candidate is settled, a full set of draft investment agreements arrives from the investor's counsel. It is common for it to be sent together with a shareholders' agreement, a distribution agreement and an appendix to the articles of incorporation setting out the terms of the class shares. My impression is that executives receiving drafts of this volume for the first time are first surprised by their sheer thickness.

As you read through the investment agreement, you may notice that the parties section lists not only the issuing company but also the founder in an individual capacity. It is natural for the company to be a party to the financing. However, many executives question why the founder as an individual should bear heavy obligations. Adding the founder as a party is seen in practice, but it is not a legal requirement. I think that the position of this party, the management shareholder, is the first hurdle in making sense of an investment agreement.

An investment agreement is a contract that sets out the procedures and conditions up to the point at which the investor subscribes for new shares of the issuing company and makes the payment. It sets out the issuance terms of the new shares, such as the number of shares subscribed for, the payment amount and the payment date. In addition, it is common for the agreement to be structured to provide for the conditions precedent to making the payment, the representations and warranties of the issuing company and the management shareholders, and the remedies available in the event of a breach of contract.

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

Definition of an Investment Agreement and Differences from the Shareholders' Agreement

The investment agreement and the shareholders' agreement are both principal agreements entered into in a startup's financing. The phases they govern and their legal roles are clearly separated. The investment agreement mainly covers the phase from the subscription for new shares to the completion of payment. It sets out the issuance terms, such as the number of shares subscribed for, the payment amount and the payment date. In addition, it is common for the agreement to be structured to provide for the conditions precedent to payment, the representations and warranties, and remedies such as damages and the share buyback right. Indemnification based on a breach of representations and warranties and similar obligations survive for the period specified in the agreement even after payment, but the central role of the agreement is achieved upon completion of payment.

On the other hand, the shareholders' agreement sets out what rights the investor will have as a shareholder after completion of payment and how the investor will be involved in the management of the company. In other words, it serves to govern the management structure and governance after payment and the rights and obligations among the shareholders. The main differences between the investment agreement and the shareholders' agreement are as shown in the table below.

Type of agreement	Main phase covered	Main matters provided for	Effect after completion of payment
Investment agreement	From the subscription for new shares to the completion of payment	Issuance terms, conditions precedent to payment, representations and warranties, remedies	Its central role is fulfilled upon completion of payment, but indemnification for breaches of representations and warranties and similar obligations survive for the period specified in the agreement
Shareholders' agreement	Operation of the company after completion of payment	Appointment of officers, matters requiring prior approval, provision of information, rights and obligations among the shareholders	Continues to apply until the time specified in the agreement's termination provisions (such as a listing)

Detailed provisions set out in the shareholders' agreement, such as matters requiring prior approval, the appointment of officers and the provision of information, are discussed in What Is a Shareholders' Agreement?. When reading the investment agreement, it is essential to compare it against the shareholders' agreement, the appendix to the articles of incorporation and other documents, and to confirm which document provides for what. Once you understand their respective roles, it becomes easier to notice that the same issue is also dealt with in a different document.

The overall picture is organized in What Is Financing Through Class Shares (Preferred Shares)? An Overview of Series A Agreements and Procedures, so I recommend that those tackling a Series A for the first time read it first. If you would like to review the investment agreement, the shareholders' agreement, the distribution agreement and the terms of the class shares across the board, please see the scope of services of our Startup Legal and Fundraising Support.

Terms of the New Share Issuance and Conditions Precedent to Payment

At the beginning of the investment agreement, it is provided that the issuing company will issue preferred shares to the investor and that the investor will subscribe for and pay for them. Specifically, it is customary for the issuance terms, such as the class of shares, the number of shares subscribed for, the payment amount and the payment date or payment period, to be set out in detail. These terms form the framework of the financing, and you should confirm that they fully match what has been agreed with the investor.

In practice, there are examples in which wording to the effect that the agreement "also serves as a total number subscription agreement" is included. It is important not to judge solely on the basis of whether that one sentence is present, but to confirm whether, in substance, the subscription for the total number of the shares offered has been agreed. Where the method of a total number subscription agreement under Article 205 of the Companies Act is adopted, the individual application and allotment procedures provided for in Articles 203 and 204 of the Companies Act can be omitted.

However, even where the total number subscription method is adopted, the determination of the offering terms itself cannot be omitted. In addition, if the shares issued by the issuing company are shares with restriction on transfer, approval of the agreement by a shareholders' meeting or the board of directors (Article 205, Paragraph 2 of the Companies Act) is in principle required. It is necessary to confirm whether the authority to enter into the agreement has been lawfully granted on the company's side. Where the total number subscription method is not used, you confirm whether the statutory procedures for application and allotment will proceed as scheduled. As for the payment date and payment period as well, it is necessary to check their consistency with the content of the issuance resolution of the shareholders' meeting or other body.

The conditions precedent to payment (CP) are the conditions under which the investor becomes obligated to make the payment, and they include the truth of the representations and warranties, the performance of contractual obligations, the delivery of required documents and the like. In reviewing the conditions precedent, it is important to distinguish between conditions that can be waived by agreement of the parties and mandatory procedures that cannot be omitted under law (such as the prescribed resolutions of corporate bodies). It is also necessary to clearly distinguish them from the grounds for termination of the agreement. For example, procedures such as the prescribed resolutions of corporate bodies cannot legally be omitted even if the investor waives them by agreement. On the other hand, the delivery of optional confirmation documents and the like can be waived at the investor's discretion depending on the circumstances. If the conditions precedent are broad or the criteria for determining whether they are met are vague, the investor may assert that a condition has not been satisfied, and there is a risk that the timing of receipt of the funds will become unpredictable.

Scope of the Representations and Warranties and Exceptions Set by Disclosure in a Schedule

One of the provisions at the core of the investment agreement is the representations and warranties. The representations and warranties are a provision confirming that certain facts concerning the business, finances and legal affairs of the issuing company are true and accurate as of reference times such as the signing date and the payment date. In this way, they serve to supplement the prior due diligence. It is a mechanism widely used in corporate transactions in general, including M&A, and in reality it is used not only in investment agreements.

The matters covered by the representations and warranties customarily extend to a wide range, such as the incorporation and valid existence of the company, the accuracy of the financial statements, the ownership of intellectual property rights and compliance with laws and regulations. If a breach of contract occurs, it invites claims for indemnification or the exercise of the share buyback right by the investor, so the content of the statements directly determines the scope of the issuing company's liability. In designing the provision, in addition to the scope of the matters warranted, a knowledge qualifier such as "to the knowledge of" and limiting wording such as "in all material respects" are used. In addition, the scope of the liability is also affected by how the reference times, such as the time of signing and the payment date, are defined.

Another practical method is the disclosure of exceptions in a schedule. General principles are set out in the body of the representations and warranties, and where there are facts that do not conform to them, they are specifically described and disclosed in a schedule, thereby ensuring the accuracy of the representations and warranties as a whole. For example, while a provision on litigation states that "there are no material disputes," if there is a dispute currently being handled, its details are expressly stated in a schedule and agreed as an exception.

What should be kept in mind with disclosure in a schedule is that submitting materials to a data room or the like does not, as a matter of course, release the company from contractual liability. If the disclosed materials and the statements in the schedule are inconsistent, this may later invite doubt as to whether sufficient disclosure was made. The materials to be submitted to investors in Series A due diligence are explained in Preparing for Series A Legal DD.

On the other hand, in the representations and warranties provision, there are structures in which not only the issuing company but also the management shareholders as individuals are included as the parties giving the warranties. There are many examples in which the founder as an individual warrants, without limitation, even matters concerning the business and finances of the issuing company. In this case, the individual ends up warranting without limit even the legality of the company's financial statements, creating a structure that imposes an excessive burden. In addition, if the definition of "management shareholder" includes a corporation such as an asset management company, it should be noted that restrictions extend even to the handling of the shares it holds.

The Share Buyback Right and Damages Provisions as Remedies

When a breach of contract or a breach of the representations and warranties occurs, the investor seeks to recover its invested capital by exercising remedy provisions such as the share buyback right and claims for damages. How these provisions are designed greatly affects the founder's personal legal liability and the foundation of the founder's livelihood.

The share buyback right is a remedy provision in the investment agreement that secures the investor's recovery of its invested capital. It is a right based on contractual agreement, and its nature differs from the dissenting shareholders' share purchase demand right provided for in the Companies Act. It is a mechanism under which the investor can demand that the issuing company or the management shareholders purchase its shares on grounds such as a breach of contract, a breach of the representations and warranties or the non-satisfaction of a condition precedent to payment.

A damages provision is a provision under which, if there is a breach of contract, the investor can claim compensation for the loss it has suffered. In investor-side drafts, there are examples in which a provision is included under which the issuing company and the management shareholders are jointly and severally liable for compensation. Where an individual is jointly and severally liable for liability for damages arising from the business activities of the company as a whole, there arises a risk that the individual will bear liability exceeding the scale of the individual's assets.

One of the issues concerning damages is the treatment of a sandbagging clause. Sandbagging is conduct in which the investor, while aware before payment of a fact such as a breach of the representations and warranties, deliberately makes the payment without pointing it out. It refers to the conduct of subsequently demanding damages or a share buyback on the grounds of the breach. Which party assumes liability for known facts is a matter adjusted as a contractual allocation of risk, and it is not conduct that is prohibited as a matter of course under law.

In addition, where a management shareholder has paid a joint and several obligation with the company and obtained a common discharge, whether the management shareholder can seek reimbursement from the company in accordance with the internal shares of the burden becomes an issue. On the other hand, where the management shareholder has merely performed an individual obligation, a right of reimbursement against the company does not necessarily arise as a matter of course. In practical drafts, a provision may be included that subordinates the exercise of the management shareholder's right of reimbursement against the company until performance of all obligations to the investor has been completed.

Practical Provisions Such as the Use of Proceeds and the Obligation to Use Efforts Toward an Exit

In addition to the representations and warranties and the remedy provisions, the investment agreement includes provisions that affect management practice after the financing. Because these provisions concern the company's day-to-day business operations and the degree of freedom in its future capital policy, it is necessary to confirm their details.

The use of proceeds is a provision specifying how the raised funds will be used. You compare it against your company's business plan and funding needs and adjust the wording to the extent that it does not hinder flexible business operations. If the restrictions on use are excessively detailed, there is a risk that flexibly deploying funds in response to changes in the business environment will be treated as a breach of contract.

The obligation to use efforts toward an exit is a provision under which the parties agree to make sincere efforts toward a future listing of the shares or an M&A transaction. As also noted in the Ministry of Economy, Trade and Industry's "Key Points to Note in Contracts for Sound Venture Investment in Japan" (Expanded Edition, September 2025, pp. 37-38), this provision is not an obligation that legally guarantees the result of a listing. It has the meaning of confirming mutual cooperation, including M&A and secondary transactions, in light of the fund's investment term. Because even an efforts obligation has a certain legal significance, you should confirm that it does not compel a specific sale procedure and that it is not tied to a trigger for the share buyback right.

Checking the provisions on lapse upon listing is also indispensable. It is customary to include a provision stating that all or part of the investment agreement will lapse upon the listing of the shares. You should understand which provisions, such as confidentiality, will survive after the listing.

The most favored nation clause (MFN clause) is a provision requiring 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 is considered favorable, the conditions for comparison and the scope of exclusions are left vague, it will become difficult in subsequent financings to coordinate the different terms of each investor.

When multiple investors participate in an investment agreement, it is customary for a definition of "Majority Investors" to be included. This refers to the group whose consent is required when amending the content of the agreement or waiving rights. The threshold for the Majority Investors is defined by a number of shares or a percentage of voting rights specified in the agreement; in some cases a specific lead investor alone is sufficient, and in other cases the aggregate of multiple investors is required. Since it does not always refer to a single investor holding a majority of the voting rights, it is essential to understand, before signing the agreement, whose consent will be required in light of your company's capital policy.

The meaning that each term of the investment agreement has as a business decision is discussed in detail in The Provisions in a Preferred Share Investment Agreement That Founders Should Look at as Business Decisions.

Practice of Contract Negotiation by the Issuing Company and the Management Shareholders

The issuing company and the management shareholders that receive a draft investment agreement need to proceed with negotiations rather than accept the presented provisions as they are. The perspective of protecting the company's business plan and the foundation of the founder's livelihood is indispensable.

In negotiating the share buyback right, the basic stance is first to consider whether the establishment of the buyback right itself can be curtailed. The Ministry of Economy, Trade and Industry's "Key Points to Note in Contracts for Sound Venture Investment in Japan" (Expanded Edition, September 2025) also sets out a direction of responses suited to the company's governance and of curtailing the pursuit of individual liability. Even where establishing the right is unavoidable, you make protective measures to avoid an excessive burden the axis of the negotiation.

As for the breaches that trigger a claim, negotiations centered on seeking to limit them to "material breaches" are the core. The breaches covered are specifically identified to prevent the right from being exercised over minor formal violations or trivial discrepancies in figures. In addition, you seek to provide a period for curing the breach (cure period) and a grace period after notice, and to limit the triggers to breaches caused by willful misconduct or gross negligence. If there is a provision that makes the failure to achieve a listing itself a buyback trigger, it is appropriate to request its deletion. A listing is an uncertain goal that is also affected by the external environment, and treating the failure to list as a breach of contract and imposing a buyback obligation would be an excessive burden.

As for the method of calculating the buyback price, the perspective of setting it objectively in advance is indispensable. The parties agree whether to use the original acquisition price as the basis, to base it on the net asset value or to use an appraisal by a third party. Where a third-party appraisal is used, unless the procedure for selecting the appraiser and the allocation of costs are also set out in the agreement, disputes over the price may become protracted.

You proceed with negotiations to remove the management shareholders as individuals from the parties obligated to buy back. Because a buyback of shares requires a large amount of funds, imposing a buyback obligation on the founder as an individual could lead to the individual's financial ruin. The Ministry of Economy, Trade and Industry's guidance also sets out, as a basic policy, excluding individuals from buyback obligations. A desirable division is one in which individual liability is considered only in exceptional cases involving a serious breach 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 without consideration also impose an excessive burden on the individual, so you request their deletion.

Even where the issuing company is the party obligated to buy back, it is necessary to understand the source-of-funds regulation and procedures under the Companies Act. Where the company buys back the shares as treasury shares, an acquisition resolution and the procedures for acquisition from specific shareholders under Articles 155, 156, 160 and other provisions of the Companies Act are required. Furthermore, the buyback can be carried out only within the distributable amount under Article 461 of the Companies Act. It should be kept in mind that simply shifting the obligated party to the company does not necessarily mean the company will be in a position to buy back the shares unconditionally. For tax purposes as well, taxation as a "deemed dividend" may arise on the amount of the acquisition consideration that exceeds the portion of the stated capital and similar amounts corresponding to those shares. It is not necessarily the case that the entire amount is uniformly taxed as a dividend or that taxation always arises in every case. However, in the practice of acquiring treasury shares, it is necessary to consult a tax accountant in advance and finalize the provisions while confirming the effects.

As for the representations and warranties provisions, you negotiate to limit their scope rather than unconditionally accepting the presented content. In particular, it is not uncommon for startups to still be building their internal systems. For that reason, you appropriately insert a knowledge qualifier such as "to the knowledge of" (considering, among other things, whether it includes the scope of a reasonable inquiry) and limiting wording such as "in all material respects." In addition, confirming the reference times, such as the time of signing and the payment date, is indispensable.

In the practice of disclosure in a schedule, you comprehensively identify the exceptions to be disclosed and link them precisely to the body of the representations and warranties. You carefully compare the materials submitted to the data room or the like at the due diligence stage with the statements in the schedule and confirm that there are no inconsistencies or omissions in the disclosure.

As for the representations and warranties by the management shareholders as individuals, the basic approach is to negotiate to remove the individuals from the parties giving the representations and warranties. Even where excluding the individuals is difficult, you adjust in the direction of limiting them to matters specific to the individual, such as the founder's eligibility and conflicts of interest, or attaching a "to the knowledge of" qualifier to matters concerning the company. For matters specific to the individual, such as the exclusion of antisocial forces, it is effective to address them individually as necessary through a side letter or the like. In addition, it is necessary to confirm whether the definition of "management shareholder" includes a corporation such as an asset management company, so as not to overlook the reach of the restrictions on the shares it holds.

As for the damages provisions, you request the deletion of the provision itself under which the issuing company and the management shareholders are jointly and severally liable for compensation. Even where deleting the joint and several liability is difficult, you attempt to adjust by limiting the events subject to damages, setting a cap on the amount of damages or setting a time limit on claims.

As a response to sandbagging, it is important to take the stance of providing a defense clause stating that the company is not liable for facts of which the investor was aware at the time of payment. In addition, there are examples in which a provision is included that subordinates the exercise of the management shareholder's right of reimbursement against the company until performance of the obligations to the investor has been completed. In this case, it is indispensable to confirm in advance which obligations are covered and until when the exercise is restricted.

As for the conditions precedent to payment (CP), you clearly distinguish among conditions that can be waived by agreement of the parties, mandatory procedures that cannot be omitted under law, and the grounds for termination of the agreement. On that basis, to prevent the timing of receipt of the funds from becoming unpredictable, you proceed with negotiations to narrow them down to content whose satisfaction can be determined by objective facts or the existence of documents. In this way, it is possible to create an environment in which the financing procedures proceed smoothly and reliably.

Frequently asked questions

What is the difference between an investment agreement and a shareholders' agreement?

An investment agreement is a contract that sets out the procedures and issuance terms from the subscription for new shares to the completion of payment, as well as the representations and warranties and the remedies. By contrast, a shareholders' agreement sets out the governance and the rights and obligations among the shareholders, namely how the investor will be involved in management as a shareholder after the completion of payment.

Can the share buyback obligation borne by the founder under an investment agreement be removed?

The Ministry of Economy, Trade and Industry's guidance treats excluding individuals from buyback obligations as the basic approach. In practice as well, to prevent the individual's financial ruin, negotiations are conducted to remove the individual from the parties obligated to buy back, or to limit the obligation to exceptional cases involving a serious breach of trust such as fraud or embezzlement.

How should a sandbagging clause in an investment agreement be handled?

Sandbagging refers to conduct in which the investor, while already aware of the fact of a breach at the time of signing or before payment, demands damages or a share buyback after payment. The issuing company requests the inclusion of a defense clause stating that it is not liable for facts of which the investor was aware at the time of payment.

What should be noted when the company buys back an investor's shares?

Where the company buys back the shares as treasury shares, the procedures under Articles 155, 156, 160 and other provisions of the Companies Act are required. In addition, the buyback is limited to the distributable amount under Article 461 of the Companies Act, and deemed dividend taxation may arise on part of the consideration, so it is necessary to consult a tax accountant in advance.