Investor Agreements: What to Include, and Why You Need One

Are you in need of working capital? Taking on investors can solve cash flow issues and free up resources.

An angled shot of two men sitting on opposite sides of a desk in an office. The man on the left, seen from over the shoulder of <a href= the man on the right, is signing a piece of paper. The man on the right is pointing at where the other man should sign. A computer monitor is sitting on the desk and facing the man on the right; its screen shows a two-page spread of a letter or contract." width="622" height="415" />

Whether you need to overcome financial obstacles, create expansion opportunities, or want added expertise, the right investor(s) can fulfill your need—provided you have an agreement outlining what those needs are and, in return, the compensation investors can expect. Learn how to write an investor agreement and help secure the funds you need to move forward confidently, then speak with a legal professional to execute the contract accordingly.

Investor agreement: what it is and why you need one

Investment agreements are legal contracts between an investor and a company. The investor supplies funds with the intent of receiving a return. In turn, the company protects the individual's financial investment in the business. The Securities Act of 1933 governs investment contracts.

According to the U.S. Securities and Exchange Commission (SEC), an investment contract is only valid if it meets the following criteria laid out by the Howey test:

It is an investment of money.
There is an expectation of profits.
The acquisition is in a common venture.
Any profit comes from the efforts of others.

A well-executed agreement can help secure the investor's interests and safeguard your company. According to Global Negotiator, "the purpose is twofold": It will ensure you meet your financial undertakings while protecting investor funds without jeopardizing your enterprise. The SEC provides a sample investment agreement, giving you an idea of what it looks like.

Types of investors

An investor can be a person or a business entity. For example, a family member could contribute some of their savings to your company in exchange for shares, or a corporation could invest funds in a joint venture where the corporation itself is the investor.

Five common investor types include:

Personal investors, like friends and family.
Peer-to-peer lenders, such as group lending or crowd-sourcing.
Banks, which act as a source of capital for established companies.
Angel investors, who invest in startups or new entrepreneurs.
Venture capitalists, including well-off investors and investment banks.

Enterprises typically use investor funds to launch a new business, scale operations, upgrade equipment, or hire new staff. However, each circumstance varies, so UpCounsel suggests seeking legal guidance before reaching out to investors.

A well-executed agreement can help secure the investor's interests and safeguard your company.

Investor agreement formats

Although the basic information required in investment agreements is the same, the structure differs according to the type of investment. Your financial and legal advisors can help you select the correct format.

The Finity Law Firm lists the most common types of investor agreements as follows:

Stock purchase agreement.
Stock option contract.
Restricted stock agreement.
Royalty, commission, or percent of revenue.
Convertible debt agreement.
Deferred compensation.

What to include in an investor agreement

A well-executed agreement should include the basics, such as names and addresses, the amount and purpose of the investment, and each party's signatures. In addition, when drafting an investor agreement, the Kumar Law Firm said to be concise and not leave room for ambiguity. "The terms of the investment should be clearly laid out in the agreement," the firm advised.

Although each investment agreement differs, most should include the following:

Fundamental terms: Describe the amount and transfer date of the investment and note the tender, such as cash, certified check, or tangible assets. Also, record the allotments of funding, a timeline of when the contract commences and expires, and if the investor gets voting rights.
Terms of the return on investment (ROI): Determine if and when the investor will receive an ROI. Stipulate what kind of ROI, namely a lump sum payment with the return on their investment, an agreed-upon interest rate paid annually, or a figure based on the project's profitability.
Other details: Include any restrictions regarding the investor's rights, a strategy for solving disputes, and consequences for violating the contract. Additionally, the Kumar Law Firm recommended addressing what happens to the funds if the company is dissolved or files for bankruptcy.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

Join us on October 8, 2024! Tune in at 12:30 p.m. ET for expert tips from top business leaders and Olympic gold medalist Dominique Dawes. Plus, access our exclusive evening program, where we’ll announce the CO—100 Top Business! - Register Now!

CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.

Join us October 8, 2024

Unlock today’s biggest trends with expert tips and inspiring stories from Olympic gold medalist Dominique Dawes! Don’t miss our exclusive evening program and CO—100 Top Business announcement!

RSVP Now for the CO—100 Small Business Forum!

Discover today’s biggest AI and social media marketing trends with top business experts! Get inspired by Dominique Dawes’ entrepreneurial journey and enjoy free access to our exclusive evening program, featuring the CO—100 Top Business reveal. Register now!

Published November 07, 2022

For more financial tips

Business woman on phone and laptop inside of her shop.

How Much Should You Pay Yourself? Here's How to Calculate a Business Owner’s Salary

A woman sitting at a cafe table holds her credit card above the portable POS device held by a cafe employee. The woman has dark curly hair and wears a blue-and-white-striped collared shirt. The cafe employee is a young dark-haired man wearing a white T-shirt and a yellow apron. He looks down at the customer with a smile.

How to Calculate Credit Card Processing Fees

A small business owner leans over his desk and enters information using his laptop computer. He is balancing his business's bank account.

How to Accept ACH Payments From Customers

By continuing on our website, you agree to our use of cookies for statistical and personalisation purposes. Know More

Welcome to CO—

Designed for business owners, CO— is a site that connects like minds and delivers actionable insights for next-level growth.