What is a Private Equity Agreement Review?
A private equity agreement is a legal document that establishes a private equity fund. It can also be used to formalize an investor’s investment in a company. In return for their investment, investors usually receive shares in the company.
Since this agreement outlines the essential information about the relationship between investor and company, such as how many shares they’ll receive and the value of their investment, it needs to be carefully reviewed.
Read the rest of this article to explore what’s included in a private equity agreement, how to review it, and when to hire a lawyer for a legal review.
What are Key Terms in a Private Equity Agreement?
Some important terms that you’ll find in a private equity agreement include the following:
- Investment amount. This describes how much the investment is worth and if it’s a share purchase.
- Dividends. How much money shareholders will receive from the firm, and when, will be defined in this section of the agreement.
- Control. In some agreements, investors will have access to a board seat or certain rights. All of that needs to be outlined in the section of the document.
- Exit strategies. If investors want to sell their shares, the agreement needs to describe how this can happen.
- Restrictions. This refers to restrictions when it comes to the selling of shares, such as pre-emption rights.
- Rights. Investee rights can include transparency, such as getting access to information about the investment status.
- Amendment rights. These clauses are important because the firm has the right to change the agreement if their circumstances require it.
How Can You Review a Private Equity Agreement?
When reviewing your private equity agreement, you should read it closely so that you ensure that you're happy with all its terms. Here are some tips to help you conduct a thorough review.
Identify the Parties
Start by checking how the parties are identified. Make sure that they are properly defined and that all roles the parties have to fulfill are specific.
Look at the Structure of the Investment
You should carefully check what security you’ll gain for your investment, such as convertible debt. The agreement should also provide information about how your money will be invested in the company so that you have clarity.
The wording in the agreement should be clear and specific, so that vague clauses that are easily misinterpreted are avoided.
Check Conditions
There could be conditions that must be met before the funding can occur, so it’s essential to know what these are. The agreement might also stipulate conditions for selling shares.
Consider Your Situation and Goals
When reviewing a private equity agreement, do so through the lens of your situation and what you hope to achieve. Think about the type of investor you are, what risks you’re okay with taking, and how the deal will affect your financial situation, such as regarding taxes.
Read Through Risk Factors
The agreement should define all potential risks involved with the investment so that you know exactly what you’re getting into before you agree to its terms.
When analyzing risk factors, you’ll want to check that there are protections in place for investors. These include dividend rights (such as being paid before other shareholders), and anti-dilution clauses (which protect you if the company issues new shares that are set at a lower price than the original ones).
Do You Need a Lawyer for a Private Equity Agreement?
It’s advisable to hire a lawyer for a review of your private equity agreement. This is because these contracts are complex with important terms you need to understand before agreeing to them. If you ignore small red flags, such as misinterpreting vague wording, it can result in significant legal or financial issues in the future.
A lawyer can help you in various ways during your legal review, such as the following:
- They’ll check that the agreement is aligned with all corporate, tax, and other laws.
- They’ll spot hidden risks in the clauses that can result in problems, such as surprise liabilities.
- They’ll ensure that the agreement is consistent with other company documents, such as term sheets and letters of intent.
- They’ll highlight any terms in the agreement that could result in misunderstandings, effectively protecting you from future disputes.
- They’ll note any unfair terms that should be revised.
- They’ll focus on long-term implications that you might not realize.
- They’ll prioritize your control, requirements, and interests.
- They’ll negotiate on your behalf for better terms. This can be helpful because you might struggle to know how to negotiate without hampering the deal.
- They’ll explain all your investor rights, such as tag-along and drag-along rights, that can help you in different scenarios.
Where Can You Find a Lawyer for a Private Equity Agreement Review?
Getting a legal review of a private equity agreement ensures that you avoid making mistakes which can cost you. But, if you need to hire a lawyer, you might wonder where to find one. Although finding the best lawyer for your requirements can feel like a costly and time-consuming process, online legal platforms prevent this from being the case.
ContractsCounsel is one of the largest online legal marketplaces that connects clients with experienced, vetted lawyers. All the lawyers have the expertise and experience to help clients with drafting and reviewing their private equity agreements.
Here are the easy steps to follow to request a legal review of your private equity agreement:
1. Start by visiting the ContractsCounsel marketplace and post your project for free, without having to leave your house.
2. Include some details of your project so lawyers know what you require.
3. You’ll receive multiple lawyer bids from lawyers on the platform who want to work with you.
4. You can review the lawyers' profiles based on important criteria that’s provided on the platform, such as their location, years of experience, expertise, and client ratings for previously completed projects.
5. Choose the best lawyer according to your legal requirements and hire them for the review.
