Starting a business venture with external capital requires creating a solid investor agreement.
This legal contract acts as a valid and binding agreement between both the company and the investor, spelling out investment stipulations, obligations, and anticipations for all involved parties.
Here’s a streamlined guide to ensure both parties share a mutual understanding and written consent, fostering a smooth collaboration in the investment journey.
Key Elements of an Investor Agreement
1. Entities Concerned
- Identify the investment agreement participants, usually the enterprise (or entrepreneur) and the investor(s).
2. Details of the Investment
- Investment Amount: Indicate the total capital invested.
- Medium: Specify whether the investment is in cash, assets, or alternative forms (i.e., company stock, etc.).
- Stock Purchase Agreement: If the investment involves purchasing shares outright, outline the terms and conditions in a stock purchase agreement.
- Convertible Debt Agreement: If the investment is structured as a loan that may convert into equity, specify this in a convertible debt agreement.
- Intent: Describe the intended use of the funds.
3. Ownership and Equity Slice
- Equity Share: Detail the share percentage the investor owns.
- Equity Type: Define whether the equity involves common or preferred shares.
- Restricted Stock Agreement: For shares subject to vesting or restrictions, detail the terms under a restricted stock agreement, which governs these limitations.
4. Voting Privileges
- Elaborate on any voting rights accorded to the investor, including the scope of influence on decisions.
5. Profit Sharing and Distributions
- Outline any policies on dividends or distribution of profits entitled to the investor.
6. Protection Against Dilution
- Safeguard the investor’s ownership share from dilution in scenarios where the company issues a greater number of shares.
7. Guarantees and Assertions
- Both the investor and the company agree to truthfully represent their capabilities and commitments in the pact.
8. Rights to Future Investments
- Offer investors the opportunity to partake in forthcoming funding rounds to maintain their ownership stake.
9. Co-sale and Compulsory Sale Rights
- Co-sale Rights: Enable minority shareholders to sell their shares alongside a majority shareholder.
- Compulsory Sale Rights: Allow the company’s majority shareholders to mandate minority shareholders to participate in the sale of the company.
10. Strategies for Exit
- Sketch out potential exit strategies, including conditions for share buy-backs or the company’s sale.
11. Dispute Resolution
- Determine the methods for resolving disputes regarding the agreement, including the applicable laws and arbitration venue.
12. Secrecy Obligations
- Ensure all parties maintain confidentiality regarding proprietary information, such as trade secrets and intellectual property, by including a non-disclosure statement.
Example Investor Agreement Template
INVESTOR AGREEMENT
This Investor Agreement (“Agreement”) is made and entered into as of [Date], by and between:
[Company Name], a company organized and existing under the relevant laws of [State/Country], with its principal office located at [Address] (“Company”),
AND
[Investor Name], an investor residing at [Address] (“Investor”).
Whereas, the Investor agrees to provide the Company with a capital investment of $[Investment Amount] in [form of investment], and the Company agrees to allocate [Percentage]% of common/preferred equity to the Investor.
1. Investment Purpose:
The investment will be used for [describe purpose, e.g., expanding operations, product development].
2. Equity:
In return for the investment, the Investor will receive [Percentage]% of [Common/Preferred] shares in the Company.
3. Voting Rights:
The Investor shall have the right to vote on [list major decisions].
4. Dividends:
The Company agrees to pay dividends to the Investor under the terms set forth in [specify legal document or policy].
5. Anti-dilution Protection:
The Investor is granted anti-dilution protection as described in [detail the terms].
6. Exit Strategy:
The Company aims for an exit event within [investment period], through [methods of exit].
7. Confidentiality:
Both parties agree to maintain the confidentiality of the terms and any business information disclosed during the term of this Agreement.
Signed by:
[Company Representative Name]
[Title]
[Investor Name]
[Title]
Date: [Signature Date]
Wrapping Up
Creating a detailed and transparent investor agreement is key to securing the investor’s interests and establishing a solid and trustworthy investment relationship. By carefully specifying the conditions of the investment contract, companies can foster healthy investor relations with financial institutions and set the stage for future growth.
This guide provides a basic framework and should be adapted to mirror the precise stipulations agreed upon by all parties involved. Consulting a legal professional is advisable to make sure all local regulations are met and the agreement holds legal weight.