Accepting investors in your small business can be a pleasant experience or it can turn into a terrible legal nightmare. It is always advisable to have an attorney prepare a comprehensive investment agreement to make sure all parties are aware of the terms of the investment and their implications for ownership and financial expectations. Under certain circumstances you may be restricted from accepting investment from people who do not qualify as accredited investors complying with the personal financial strength required. Before you enter into an investment agreement, your attorney should thoroughly review any legal requirements that pertain.
Any investment agreement, whether it is for investment in a small business or a large enterprise, functions as a written record of the complete terms and requirements of performance between the business owners and their investors. When it comes to money matters, it is always wise to put every agreement in writing, particularly investment agreements that spell out the results of negotiation between the company owners and the investors, and their various promises and obligations under the contract.
Investment agreements can range from a simple stock purchase agreement to a complicated document with many different provisions. Some investment agreements start out as convertible loans that allow the investor to convert the loan to stock ownership at a certain price at a specified future time. Similar agreements use convertible preferred stock instead of debt instruments.
The investment agreement lists all parties to the transaction, their legal names, addresses and other contact information. It specifies the amount of the investment, the percentage ownership conferred to the investor, dilution provisions, time frames, and definitions of obligations of the parties, causes for termination, satisfaction of default on the agreement and arbitration or settlement procedures. The parties, in signing the agreement, testify that they are authorized to make such an agreement and financially and legally able to invest money in the business.
An investment agreement is only as good as the intent of the parties to that agreement. It is never advisable to accept investment, no matter how well defined, from a difficult person who is likely to be a nuisance to company management or make unfounded claims of fraud and misrepresentation should the company fail and the investment turn into a loss of money.
Written and witnessed investment agreements are important proofs of the legality of the transaction and resulting ownership in the event of death of any of the parties. They protect the business owner from frivolous investor claims and provide the investor with legal recourse in the event of fraud. When the investor is also a participant in the business, the investment agreement formalizes his monetary contribution and percentage of ownership so there are no future arguments over ownership rights.
Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager. Since 1995 she has written many articles for e-zines and was a regular columnist for "Digital Coast Reporter" and "Developments Magazine." She holds a Bachelor of Arts in public administration from the University of California at Berkeley.