Seed Investment Agreement (Ordinary Shares)

You are viewing content for Hong Kong.

What is it?

A Seed Investment Agreement (Ordinary Shares) is an agreement used by a company to raise capital. In the case of an early-stage startup, this is seed money to bring a business idea to life. For a more established business or later-stage startup, it is likely to be to increase available working capital in order to grow or expand existing operations.

A company raises capital in this way by issuing new ordinary shares (as opposed to selling existing shares for which a Share Sale and Purchase Agreement is used). The money paid for these new shares goes to the company account, to be used by the company at the discretion of the board.

Why do you need it?

It is common for founders to seek early-stage business financing. Issuing shares in exchange for "risk capital" solves the chicken-and-egg problem of a company needing money now to make money in the future.

An investor pays for a portion of the shares of the company (taking the risk that the investment may be worth nothing in the future if the company is not successful), but with the upside that they may have found the next Facebook. The price that the investor pays for the shares and the amount of shares that are issued are key negotiation points, but it is uncommon for an investor ever to take more than a minority stake in a company at a "seed round". This ensures that the founders own sufficient of the company themselves to ensure they are motivated to make it successful.

Investors may be friends and family, high net worth individuals (either alone or in investing groups, often called angel investors), venture capital firms that specialise in early-stage investments, or incubators/accelerators that specialise in increasing the rate at which founders can grow their business. Investors often provide more than just money, and a good investor profile will be one that provides capital, know-how and experience, and a relevant network. To learn more about the financing options available to your company, you may download our eBook here.

The Seed Investment Agreement is the essential document to set up parties' rights and obligations in the shares, share allotment, and share transfer process.

Key clauses to watch for:

When drafting a Seed Investment Agreement, it is important to focus on a number of key clauses, in particular:

  • Details of the company;
  • Details of the investor (are they investing personally or through a company);
  • Amount of the investment and the number of shares to be issued;
  • Agreed valuation of the company (both before and after the investment, referred to as "pre-money" and "post-money");
  • Composition of the board (and specifically whether the investor will have a board seat); 
  • Investor's rights;
  • If there will be any restrictions on founders; and
  • Whether a share option pool will be established to compensate future key hires.


Seed Investment Agreement (Ordinary Shares) Document