Creafting an Investment Agreement: A Step-By-Step Guide (+ Free Template) (2024)

An investment agreement serves as a crucial safeguard for organizations and their investment partners, fostering strong partnerships and paving the way for accelerated growth opportunities.

However, these documents are typically complex, laden with intricate legal and industry-related concepts that contract management teams sometimes struggle to communicate to investors.

This makes investment agreements inherently risky, as there are usually high chances of misinterpretation, inefficient negotiation, non-compliance, and disputes.

To ensure your investment agreement adequately protects your organization’s interests and provides realistic expectations for your investors, there are certain steps that you must not miss.

In this guide, we have detailed everything you need to know about investment agreement along with a template to help you set things up more efficiently.

What is an investment agreement?

An investment agreement, also called an investment contract, is a legally enforceable document that describes the rights, obligations, terms, and conditions of an investment transaction between individuals and entities.

Investment agreements are commonly used in various scenarios, such as private equity, venture capital, joint ventures, and mergers and acquisitions.

Per the United States regulations, an agreement or transaction is legally considered an “investment agreement” if it has the following elements outlined by the Howey Test:

1. Monetary investment: It must involve money or value in the form of fungible assets. This could be currency, cryptocurrency, property, or other forms of value.
2. Profit expectations: The parties involved must be doing so with the expectation of making profits.
3. Common enterprise: The transaction must involve multiple individuals or entities joining resources to make the business a reality with the intention of sharing the profits or losses.
4. Efforts of others: The investors must not rely solely on their own efforts to make a profit but are dependent on the efforts of others, such as the managers of a business or the developers of a new technology.

Several types of investment agreements exist today, including stock purchase agreements, royalty agreements, convertible debt agreements, and statutory stock options, among others.

Key elements of an investment agreement

Investment agreements are typically complex, and the specific elements required for each contract vary, depending on the type of contract, parties involved, business jurisdiction, and industry regulations.

However, there are certain critical components that are often present in all investment agreements. Let’s briefly discuss them.

#1 Introduction and background information

This section provides a comprehensive description of the investment contract, including the names and legal entities of the parties involved. It also offers a detailed description of the background, purpose, and objectives of the investment.

Additionally, this section may include information about the industry or market in which the investee operates, highlighting any relevant trends or factors that could impact the investment.

#2 Investment terms and conditions

Here, the investment terms and conditions are extensively outlined. It includes a detailed explanation of the investment amount, the specific nature of the investment (e.g., equity, debt, convertible note), and any associated rights or preferences granted to the investor. It also covers any conditions or milestones that need to be met by the investee to access the investment, such as achieving specific financial targets or meeting regulatory requirements.

Furthermore, this section may specify any performance metrics or key performance indicators (KPIs) that will be used to evaluate the investee's progress.

Also read: 4 Crucial Contract Management KPIs to Track for Legal Success

#3 Rights and obligations of the parties

This section covers the rights and obligations of the parties involved. It discusses several aspects, including voting rights, participation in decision-making, information sharing, board representation, non-compete and non-solicitation obligations, restrictions on transfer, confidentiality, and compliance with laws and regulations.

These provisions ensure that the parties' rights are clearly defined and protected, facilitating effective governance and collaboration throughout the investment process.

#4 Investment amount and payment terms

Here, the specific investment amount is clearly stated, including the currency in which the investment will be made. It also provides a detailed breakdown of the payment terms, covering any instalment schedules, milestones, or conditions that must be fulfilled to enable the release of investment funds.

This section may also include provisions for escrow arrangements or other mechanisms to ensure the proper disbursem*nt of funds and mitigate risk for both parties.

#5 Governance and decision-making processes

Here, the document outlines the composition and responsibilities of the board of directors, the process for board meetings, and the role of the investor in strategic or operational decisions.

It may also include provisions for the investor's participation in committees or advisory boards, if applicable, and any requirements for unanimous or majority consent for specific decisions.

Also read: How to Establish a Successful Contract Governance Framework

#6 Reporting and accountability requirements

This section comprehensively details the reporting and accountability obligations of the investee, specifying the frequency of financial and operational reporting that the investor will receive.

The investment agreement may require the investee to provide regular financial statements, management reports, and forecasts, including KPIs or metrics that parties will use to monitor the progress and success of the investment.

It may also detail any requirements for independent audits and external assessments to foster transparency and accuracy.

#7 Termination and exit provisions

Here, the contract describes the conditions and procedures for terminating the investment contract and the potential exit strategies available to the investor. It provides a detailed description of specific events during which either party is allowed to terminate the agreement, such as a breach of obligations, a change in control of the investee, or the achievement of specific milestones.

It may outline the procedures for valuing the investment upon termination and any potential restrictions or obligations related to the investor's exit, such as lock-up periods or non-compete clauses.

#8 Dispute resolution mechanisms

This section outlines accepted mechanisms for resolving disputes that may arise during the investment period. It may include a tiered approach to dispute resolution, starting with negotiation and escalating to mediation or arbitration if necessary.

It can specify the choice of jurisdiction, the applicable laws, and any requirements for legal proceedings. Additionally, it may include provisions for the reimbursem*nt of legal fees and the enforcement of dispute resolution decisions.

Also Read: Finding Common Ground: How to Resolve Contract Disputes

#9 Confidentiality and non-disclosure agreements

This section establishes comprehensive provisions for protecting the confidentiality of sensitive information exchanged between the parties. It specifies the types of information considered confidential, including trade secrets, intellectual property, financial data, and business plans.

It outlines the obligations of both parties to maintain confidentiality during and after the investment period and may include provisions for non-disclosure agreements, non-solicitation of employees, and the return or destruction of confidential information upon request.

Steps for creating an effective investment agreement

An effective investment agreement plays a crucial role in protecting the interests of investment partners and establishing mutually beneficial partnerships.

But an investment agreement is typically complex and takes diverse forms, depending on the nature of the contract and presiding regulations. To ensure your investment agreement is comprehensive and robust, ensure you follow the steps discussed below.

#1 Identify the parties involved and their roles

Proceed by outlining the names and relevant details of all parties participating in the investment, such as individual investors or corporate entities.

Clearly define the roles, responsibilities, and obligations of each party involved in the investment. That way, you establish a clear understanding of everyone’s contributions and expectations.

#2 Clarify the investment terms and objectives

The primary purpose of the investment agreement, whether it's for funding a project, acquiring assets, or expanding a business, must be clarified in the document. Ensure you specify the duration of the investment and any milestones that must be achieved.

Also, clearly state the amount of investment being made and the agreed-upon payment terms, such as the timing and payment methods (e.g., lump sum, installment payments).

#3 Determine the structure and nature of the investment

Will the investment exist as equity, debt, or a hybrid instrument? Outline this in the agreement.

Clearly define the ownership percentage or shares allocated to each investor and specify the voting rights associated with those shares.

You should also define how the investment will be evaluated and valued, especially in the case of equity investments. This may include methods such as discounted cash flows or comparable company analysis.

#4 Conduct due diligence and research

It is important to have detailed information about the investment opportunity and the parties involved before committing to it. Your due diligence should be thorough and cover the company's financials, business model, market conditions, competition, and potential risks.

Also, ensure that financial statements, legal contracts, licenses, permits, and any other necessary documentation supporting the investment's potential and viability are made available.

Also read: Company Due Diligence Checklist

#5 Use clear and easily understandable language

The agreement should be written in plain language that is clear to all parties. Avoid complex legal jargon and terminologies that may confuse or mislead the parties involved.

Ensure that each clause or provision is straightforward and specific and provide concise definitions to make technical terms digestible.

#6 Organize the content logically

Divide the agreement into sections or articles that cover different aspects of the investment agreement, such as introduction, definitions, investment terms, representations and warranties, covenants, conditions, and termination clauses.

If the contract is long and complex, you can include a table of content at the beginning of the agreement to help the parties easily navigate through the document and find specific sections.

#7 Have a section for defining key terms and concepts

Include a glossary that defines important terms used throughout the document for easy reference. A section like this makes your investment agreement more digestible, especially if it contains complex industry-specific terminologies.

If certain terms or concepts require additional explanation, include references to relevant documents, such as legal statutes, industry standards, or guidelines.

Also read:

#8 Make provisions for potential contingencies and risks

Ensure you include provisions for potential challenges or events that could impact the investment. Such incidents may include financial crises, regulatory changes, technology disruptions, corporate scandals, non-performance, disputes, etc.

Provisions like termination clauses, dispute resolution procedures, insurance requirements, and contingency plans are paramount to safeguarding the interests of all parties and keeping the investment relationship as healthy as possible.

Also read:

#9 Incorporate legal and regulatory requirements

Ensure you incorporate all legal and regulatory requirements relevant to the investment. This includes securities laws, tax regulations, anti-money laundering laws, and any other applicable statutes.

Include necessary disclosures, representations, and warranties. These may include financial statements, legal compliance certificates, or other documents required to meet regulatory obligations.

Free investment agreement template

An investment agreement template takes off the hassles associated with drafting an investment contract from scratch. The best ones come loaded with several sections, incorporating all the right provisions to ensure your final outputs are safe, compliant, and effective.

That is precisely what we've prepared for you. However, understand that this is only a template, and to get the best results, you must customize it to fit your company's objectives and industry requirements.

Before you go…

This guide discussed the concept of investment agreements, exploring key components and steps for drafting effective contracts for your investment deals.

However, regardless of what kind of contract you're entering, you have a higher risk of underperformance, penalties, financial losses, and disputes if you do not implement proper contract management mechanisms.

This is where SpotDraft comes in. SpotDraft offers everything you need to minimize the risks associated with poor contract management, ensuring that your investment agreements are properly drafted, executed, monitored, and maintained throughout their lifecycle.

Some of its most popular features include easy-to-use contract templates, a collaborative editor, a robust repository, and comprehensive automation functionalities.

Want to see how SpotDraft can make your contract management ten times better? Request a demo.