The bane has all been accounted for and your investor has finally said yes with your investment proposal. However, like any other opportunity that is not that simple to come by, you have now designated with another hard-to-deal-with the task of sealing the deal by drafting a simple investment contract. You may also see Contract Templates
As a start, an investment contract is a legally-binding agreement that serves as a proof of transaction between a business owner and an investor. Essentially, it specifies the terms of the investment like the amount that needs to be invested, the date on when the investor can expect the return on investment, and how the investor will be able to procure it. Whether you are a small business upstart or a large corporate emperor, an investment contract is required to bring outside investors into your business. This article discusses the aspects you need to know in drafting that simple investment contract as well as a selection of samples and templates.
1. Investment: This refers to the money or any sort of valuable asset that an investor provides in exchange for a beneficial interest or stock ownership of the company.
2. Enterprise: An enterprise is any form of business activity with the goal of generating profit. It is the entrepreneurial venture of the company founder and can come in various forms such as sole proprietorship, partnership, and corporation.
3. Profit: An investment contract must be able to tell the amount of profit that an investor will get as well as your business timeline that states the projected return of their investment.
4. Investor Rights: The investor does not have to actively take part in running the business itself. They may provide assistance and guidance from time to time but the active, everyday affairs and events of the business are the responsibility of the founders.
5. Investing Parties: The existing shareholders (which includes the founders), the investors, and the future shareholders are the relevant entities that you should consider in drafting your investment contracts. It is important to provide a provision that considers your future shareholders as it will provide an ease of transfer of stocks for your investors who want an ownership of the company.
1. Contract Staples: Before drafting the main provisions of your investment contract, fill it out first with the following parts:
2. Basic Terms of Investment: the First term in your investment contract should describe the basic grounds of the agreement, like the amount of funding you need, the date you expect the investment will be transferred, and the forms of investment that are available. An investment can be conferred through wire transfer, cash, or check depending on what you agreed on.
3. Return on Investment: Your investors would want to know when they can reap the profit of their investment, which is why your investment contract should be able to provide that information. Indicate the expected date of their ROI as well as its type of payment, whether it will be at a flat interest rate or at a success-based return rate.
4. Investor Rights: The investors must be able to know if they will have any rights or executive position in the company. Basically, this last part will tell them their responsibilities, duties, benefits, and other aspects for them to monitor their contributed funding. An investor may be vested with a voting right in managing the business, or they may be tasked to manage operations of the company, which usually happens in small corporations. Draw boundaries but be clear about their rights.
Consider asking for investments in the form of assets: The investments that you will be asking does not necessarily mean monetary, as it can also come in the form of tangible assets from your investors. However, since this is an investment, you must be creative enough to come up with a way where you will be able to replicate these assets, with the interest, as the investor that pooled this in the first place would want it back from you.
Come up with an investor’s exit: A good investment contract will state the particulars on how the investment will be handled if the company is unsuccessful or forced to enter bankruptcy. Provide information on how much of the remaining assets of the company they will receive in the event of the company’s demise and contract termination.
Different types of investment contracts exist and have their own usage depending on the financial plan that the company is implementing, and these are the following:
Simple investment contracts are drafted on documents with standard sizes of US legal (8.5 inches by 14 inches), US letter (8.5 inches by 11 inches), and A4 (8.27 inches by 11.69 inches).
Investing is simply an act of working smart, instead of working hard, with your money as you commit some of it to provide as a capital for a certain venture or business endeavor with the expectation of obtaining profit from the business. Simply put, it is the act of laying out the money to receive more money in the future.
Royalty investment contracts offer a low-risk and stable investment scheme for the investors, as they will not rely on the fluctuating value of the company in the stock market. The company founders do not also have to share ownership and can maintain independence in the direction they want for their company.
You may have already secured your funding as the investors are now bound to sign your investment contract. But, the real challenge is yet to start as you commence your business operations. Pressure piles on and it will be far from a walk in the park, but such obstacles make up for a grand journey toward success.