Although starting a new small business is an exciting time, it costs money. That’s why most business owners make an important financial choice – finding investors who could fund their business. After choosing somebody to fund your business, you want to make sure everything goes smoothly, and your business is safe. An investment agreement template can become your guarantee for safety.
Investors Agreements can help protect your basic interests from liabilities if you are entering into a business relationship that involves transactions and/or shares. Your business may be backed by investors or you may be the one investing the capital yourself. It’s best to consult a lawyer when entering into this kind of agreement.
Investors Agreements may be needed in the following circumstances:
Investors Agreements can be used to resolve disagreements between investors. You can also use an investors agreement template to protect your interests if you are a minority shareholder.
Investing in a business involves many risks, both for investors and companies. It is important to manage these risks properly. It is particularly important for start-ups and SMEs who are in their early funding rounds and can ill afford a costly and expensive legal fight. An investor’s agreement also outlines the rights and obligations of the parties.
Before creating an investment contract, you need to understand the different types. Among them include the following:
This is an investment agreement template in which an investor receives a percentage of your corporation’s shares in exchange for money. The investor becomes a shareholder after the investment transaction is completed.
This agreement can be classified as non-qualified or qualified stock options. In stock options, your investors have the right to purchase your company’s stock at a certain price in the future. Investors use this agreement to obtain a fixed price for company stock in the future.
An entity or person agrees to lend money to a company with an option to convert the money they loaned into ownership in the company. An agreement specifies who can convert debt into equity.
In exchange for an investor’s effort and time, your company agrees to give shares to them. When an investor fails to contribute effort and time during the set period of time, then they cannot claim ownership of your company stock.
This isn’t a “contract for investment” because the investor doesn’t receive equity ownership. An employee agrees to work for you in exchange for a salary, a bonus, or compensation in the future.
The following are some key clauses you should include in any investment agreement you write:
Deeds of adherence treat the transferee as an original party to the investment agreement. By entering into a deed of adherence, the transferee accepts all the terms and conditions of the investment agreement.
In this case, the investor pays the entire investment over time. Progress is measured by agreed-upon milestones.
The founders of a company usually make a warranty that certain facts or circumstances are true at a given time. The investor will be entitled to claim damages if the warranty turns out to be false. An investment agreement that incorporates warranties mitigates risk.
For the purpose of protecting their investment, investors reserve a range of rights in the investment agreement. Investors typically reserve the right to receive financial and management reports and involvement in matters requiring investor consent.
An investment agreement might include pre-emption and first refusal rights for investors. An investor can avoid dilution if the company sells additional shares to other investors.
An investor may become privy to sensitive company information during discussions with the company. A confidentiality clause protects proprietary and sensitive commercial information and expressly states which information can and cannot be disclosed to third parties.
Founders/managers of the company can’t compete with the company inside the company or after they leave the company when signing non-compete agreements. The founders’/managers’ employment and service agreements often include non-compete clauses.
Certain financial documentation is often required to be provided to investors by the management of the company. Business plans, budgets, management accounts, and audited accounts are required by investors.
In an investment agreement, investors typically retain the right to appoint directors. Investors specify that without these directors appointed by them, there will be no quorum at board meetings. Directors ensure that management runs the company in the interests of the shareholders, such as the investor.
Standard clauses in every contract are known as boilerplate clauses. Many contracts include boilerplate clauses at the end with more substantive clauses at the beginning.
An investment agreement should include other basic clauses and components, including the name, address, date, and signature of each party.
Download our printable free investment agreement template in Word or PDF.
Clients and Investor Information Here:
WHEREAS Investor plans to invest $dollar amount
WHEREAS the Client is involved in (business); and
WHEREAS the Client plans to use the Investor’s funds for (goal of investment)
As a result of the covenants and agreements contained herein, the Parties agree as follows:
On the Effective Date, this Agreement shall commence and terminate upon the Client’s payment of the proceeds from the Investment.
Investors will be compensated as follows:
Investors will receive (provisions agreed upon)
The Investor shall receive the following payment from the Client:
The Investor shall be fully compensated within (period of time) after (funds issued)
The Investor shall be made available a report showing (agreed-upon terms) within (number) days of the end of (campaign/event).
If either party determines the other party is in breach of this Agreement, this Agreement may be terminated without penalty.
As between the Parties, this Agreement constitutes the entire agreement between the Parties.
Both parties must sign amendments to this Agreement in writing.
This Agreement may be modified if any provision or provisions are held to be unenforceable. This Agreement shall remain in full force and effect throughout.
(State) laws shall govern and construe this Agreement without reference to conflict of law principles, which might result in the law of another state is applied. The parties hereby consent to the exclusive jurisdiction and venue of the courts, state and federal, having jurisdiction in (state).
As of the Effective Date, the Parties, intending to be legally bound, have each executed this agreement.
Review your agreement with an attorney before signing any documents or entering into any partnership.
In a shareholders agreement, the shareholders lay forth their obligations and outline how they are to exercise their rights regarding the company’s management and operations.
Investment agreements govern investments in exchange for equity in a company. Investment agreements govern only a specific transaction. Shareholders’ rights towards the company are not regulated in it.
Frequently Asked Questions
Significant shareholders in exploration companies are entitled to impose conditions on their investments. These conditions are outlined in investor rights agreements.
Startups and investors sign SAFE contracts that give the investor the right to receive equity in the company in response to certain trigger events, such as future equity financings (also called next equity financings or qualified financings), usually led by a venture capital fund.
You're not officially obligated to repay your investor, but there is a catch. You are giving away your future net earnings by handing over equity in your business.