21+ Simple Investment Contract Templates
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.
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Elements of a Simple Investment Contract
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.
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1. Contract Staples: Before drafting the main provisions of your investment contract, fill it out first with the following parts:
- Preamble: The preamble is the introduction of every legal agreement. For your investment contract, your preamble must state the type of agreement, identify the names of the parties involved, and the effective date of your contract.
- Recitals: After this part comes a small series of statements that lay out the intentions of the investment contract. These are called the recitals and each paragraph starts with the term “Whereas”.
- Signature Blocks: While the first two parts prelude the provisions of your agreement, the signature block is the part that concludes your document. It contains the name, position, and company of the parties involved with a space above it for their signatures. Once this part is signed by both parties, the document will become official and legally binding.
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.
Tips for a Great Simple Investment Contract
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.
Types of Simple Investment Contracts
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:
- Stock Purchase Contract: The most basic of all types of investment contract, a stock purchase agreement is where the investor funds the company and getting a stock, or a fractional ownership of the company, in return. They are often employed by small corporations that sell their stock and works basically like purchasing a stock from a stock market. However, since the company is playing with larger stakes here, it involves a lot more paperwork than the process involved in a regular stock purchasing, as it needs a concrete, legal agreement of the sale.
- Non-Statutory Stock Option Contract: This type of investment agreement gives stock options, or the ability to purchase ownership of the company at a discounted price within a certain time period, to the investor. Non-statutory stock option agreements generally have no formal requirements, but they have less beneficial tax treatment since it is not regulated by a legal code. In other corporate setups, it is also known as non-qualified stock option agreement.
- Statutory Stock Option Contract: The statutory stock option agreement is pretty much like a non-statutory contract that also confers discounted business stocks to the investors. However, this type yields higher front cost for the company and has strict requirements imposed by internal revenue agencies. In exchange for the hassle that the investor must go through for the agreement to be certified, statutory stock option agreements grant them with a beneficial tax treatment.
- Convertible Debt Contract: Convertible debt agreement is a type of investment contract that gives more flexibility to the investor when it comes to what they want to happen with their money. Typically, the investor has two options. One is that the funding they pooled into the company will be treated as a business loan and will be repaid by the company with interest; two is where the debt is converted into a stock or share of the company. Whether or not the investment is converted to stock, paid back as a loan, or be made to be a mix of both is determined by the terms in this contract.
- Royalty Contracts: Some investors don’t want to receive stocks or own a percentage of the company in exchange for their investment. For this type of case, the company and the investor will have to agree on a royalty contract. Under this kind of investment contract, the investors receive a constant percentage of the company’s profit at a periodic interval of time, may it be monthly, semi-annually, or annually.
Simple Investment Contracts Template Sizes
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).
Simple Investment Contract FAQs
What is investing?
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.
What is the advantage of paying royalties to an investor instead of sharing stocks with them?
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.
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