What Should Be Included in an Investor Agreement?

Originally published by Austin TX Business Law Blog.

Securing investors is often a critical component to starting or growing a business. In order to maintain and protect your important relationship with your investors, an investor agreement should be carefully drafted and include several key terms. The investor agreement can bring peace of mind to an investor that his or her investment interests are being protected and to the company that the investor funds will be seamlessly transferred and founder interests have been preserved.

What to Include in an Investor Agreement

An investor agreement is a contract that outlines the terms of an investment. The agreement should, of course, include the very basics, such as:

• The names and addresses of the parties
• The purpose of the investment
• The date of the investment
• The structure of the investment
• The signatures of the parties

The terms of the investment should be clearly laid out in the agreement. This means that you should state exactly how much the investor is providing and when the transfer of the investment to the company will be made. The agreement should also state the type of the investment. While the majority of investments come in the form of cash, check, or wire transfer, sometimes investments come in the form of tangible assets. Additionally, the length of time that the investor agreement will be valid should be established as should the length of time it will take for the investor to receive the return on investment (ROI) that was agreed upon.

The agreed-upon ROI should also be stated in the agreement. The terms of the ROI to be addressed should include what the investor will be getting in return for the investment. The ROI may simply be the return of the invested amount or the invested item. If the ROI will be something else, the investor may be paid something like a flat interest rate on the investment or may receive a rate of return on investment that is based on the success of the investment.

The agreement should also address what will happen to the investment if the company is dissolved or files for bankruptcy. Any known risks associated with the investment should not only be disclosed to the investor but should be memorialized in the investor agreement. It needs to be made clear that the investor is not guaranteed a ROI.

In some cases, an investor is given management or control rights within the business as part of the investor agreement. If so, this should be included in the agreement itself. An investor may also be given voting rights in the company so that they are able to participate in making business and management decisions. Before granting an investor these kinds of rights, check your articles of organization and operating agreement to see if this will comply with previously established company procedures.

Texas Business Law Attorney

Securing an investor can be a major victory for a business. Do not let it turn into a major headache by failing to properly draft an investor agreement that will not only protect your investor, but will protect your business. The Kumar Law Firm will draft investor agreements and any other business contracts necessary to help secure the continued success of your business. Contact us today.

Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.

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