Investor agreements generally cover any transaction that gives other people or businesses ownership interest in the company. This could be of interest now or into the future and could be in exchange for anything of value such as cash, labor, an asset, and more.
Some common types of investors agreements are:
- Stock Purchase Agreement
- Royalty, Commission, or Percent of Revenue
- Convertible Debt Agreement
- Deferred Compensation
Stock Purchase Agreement
A stock purchase agreement is one of the more simple options for investment agreements. Generally, money is given in exchange for stock, much like you would do when purchasing stock from the stock market, but because the company is not publicly traded, the paperwork is more complicated.
If you are considering this type of strategy, you should meet with an attorney who understands not only the transactional and drafting side but the actual real world business situations that apply.
Royalty, Commission, or Percent of Revenue
In a lot of situations, investors only want to own the rights to profits of the company or product of the company. For an investor to be entitled to such distributions, a royalty agreement, also known as Commission Agreements or Profits Interests, can be created.
In this type of agreement, an investor would give money up in exchange for a certain percentage or dollar amount that vests over a period of time.
An example would be in Jane wants to give $50,000 to ABC (company) in exchange for $10 per widget sold by ABC for the first 5 years. Jane is assuming that by giving the company $50,000, they will sell more than enough widgets to make her investment plus more back.
In this situation, she doesn’t own any part of the company but rather has a contract to receive a portion of each widget sold by the business. It should be noted that there are no rules stating a limitation on the number of years or percentage of profits/ amount of interest per product the investor can take.
Thus, Jane above could take 99% of profits forever if the owner agrees to it.
Convertible Debt Agreement
Convertible debt allows an investor to loan money to a company and then later either be repaid or convert the debt into their own ownership interest of the company.
The terms of the contract will determine whether or not the debt is converted to ownership or gets repaid.
An example would be if Dexter gives $100,000 to ABC (company) in exchange for a convertible debt note that will either be repaid in 1 year with 50% gain or converted into 100,000 shares of the company’s stock.
Deferred compensation results, not in ownership, but rather allows the recipient to ownership through one of the other types of agreements. An example would be employees who agree to receive bonuses or larger salaries later for the work they put in now.
Basically, the investment of time for them is an investment for the sake of the company which will vest later through a deferred compensation agreement.
The different investment agreements can be combined to satisfy the requirements of the specific situation between the investor and the owner of the company.
If you are considering taking someone else’s money or investing money in a company, you should see a CPA and an attorney to help advise you through the process.