Investment Agreements 101

By Lillane Mair, Esq.

An investment agreement is generally a transaction which gives a person or business an ownership interest either present or in the future in your company/project.

As an entrepreneur there are many ways to structure an investment agreement.  The structure of the agreement will depend of the type of the investment. In this excerpt we only discuss equity investment agreements.

One of the initial considerations when structuring an equity agreement — whereby an investor will retain an ownership share of the investee/entrepreneur’s company –is checking the relevant documents. Relevant documents such as the company’s article of organization or the company’s operating agreement to make sure the investee/entrepreneur is issuing shares from the company in accordance with the company’s procedure.

Basic terms of a good investment agreement will clearly identify how much the investor will provide, the time frame the investment will be transferred, and the form of the investment; cash, check, wire transfer, or tangible assets.

An essential term is the Return on Investment (ROI). The contract must state when the investor can expect a return on his/her investment; and whether the investor will get a flat interest rate or a return rate based on the success of the investment.  The ROI should also consider how the investment will be treated in the event the company bankrupts or dissolves.

Another term that should be in an investment agreement is whether the investor has the right to vote in management decisions, day-to-day business operations; and whether the investor can vote for members of the board in the company.

An investment agreement should also clearly address when and what type of reports and notices the investor can expect.

A consideration usually overlooked is how an investee/entrepreneur can ultimately regain the stocks issued to the investor. A sophisticated agreement will anticipate this possibility; and structure an agreement whereby the investee/entrepreneur can regain total control of his/her’s company/project.

This excerpt only presents a few considerations. If you are an investor or an entrepreneur/investee and would like to explore your investment agreement options please contact Simmons Grant at 646-278-4884. We look forward to discussing, negotiating and drafting your investment agreement today. All Content and Rights Reserved. Attorney Advertising. Prior results do not guarantee similar outcome.