A Brief Introduction About the Equity Investment Agreement
An equity investment agreement is signed when bondholders decide to pay money to a company in return for the chance of a forthcoming return on their investment. An equity investment contract holds significance for businesspersons due to the investor associates involved and no payment schedules. Equity Fundraising means that depositors give money to the company, which will seemingly help to be more valuable as the corporation advances success.
On the other hand, the equity contract denotes an adaptable bond that the proprietor can convert for a mutual stock when the bond reaches its maturity.
Who are Equity Investors?
Equity investors are individuals who capitalize money into a corporation so that they get a share of possession in the company. Characteristically, these investors will have no assurance of an ROI and might lose their capital when the corporate goes out of business.
Who Takes the Equity Investment Agreement?
An equity investment contract is signed by two different companies to scale up the capital and get valuable support, guidance, and resource between the equity investors. It occurs when investors agree to give money to a company in return for the possibility of a future return on their investment.
Purpose of an Equity Investment Agreement – Why Do You Need It?
Businesspersons are normally determined to make new undertakings with a driven desire for a specific business. However, the fundamental drive of any occupation is delivered income and, for numerous others, to make a huge profit. Equity is a significant idea in business and personal finance; it is needed to outline the ownership details that an individual has.
Contents of the Equity Investment Agreement – Inclusions
When you aim to collect comprehensive details about the Equity Investment Agreement, you should know its contents as well. The Equity Investment contract should ideally mention the owner’s equity that describes the total amount of equity that a business owner has in his company and the terms and conditions with subject to the conditions.
These details must be included to avoid any conflicts and confusion.
[ Also Read: Equity Purchase Agreement ]
How to Draft the Equity Investment Agreement?
Below, opinions should be kept in mind at the time of drafting the equity agreement.
To protect yourself against any future claims about the legitimacy of the signatures on the contract, you can get this authorized by a notary. The simplest method to write such documents is to look for an equity agreement template and modify it as per your requirements.
Your contract must have below points:
- Valuation and equity split: This particulars the money assessment when the contract gets signed and the standard shares and asset amount for the individual founder.
- Capital Infusions: This explains the way things will be controlled if the business requires a sudden call for investment.
- Vesting schedule: You must even note down the details of the shares when the business decides to sell them to the third party.
- Noncompeting: You must ensure to forbid equity holders from functioning with an opponent.
Benefits & Drawbacks of the Equity Investment Agreement
Here are a few equity investment agreements’ pros and cons.
Benefits
- The major advantage of an equity investment contract is that the interest you pay on debt investment is tax-deductible, as well as your loan payments are predictable from month to month.
- You do not have to pay interest to your investors, though you will owe them a few portions of your profits.
- You perhaps won’t need to make monthly payments till you make a profit.
- Most equity investment agreements assure that a major investor contributes to any stock sale and supports any unification, irrespective of their proportion of stock ownership.
Drawbacks
- The seller might have to provide a bank guarantee if there is any breach of warranty.
- Rising interest rates, market volatility, and credit risk might take place.
Negotiation Strategy
After an investor meeting, summarize the main points made and the proposed or negotiated terms. Follow-up and clarifying questions that will avoid misalignment later and will help demonstrate your interest to the investor at hand.
Asking clarifying questions will demonstrate your interest, but will also build trust between you and an investor and enable you to draft a better agreement, securing the interest of both the parties.
What Happens In Case of Violation?
Regardless of whether agreements are oral or written, they are meant to justify a promise. Contracts are drafted with the utmost care to avoid any discrepancies. If the agreement has all the details about terms and conditions, it gets easier for the parties to deal with any problems and conflicts.
Under the law, once a contract is breached, the guilty must remedy the breach. Should this occur, the damaged party can file a civil lawsuit(1). When a contract is broken, the non-breaching party is dismissed of his responsibilities under the contract.
Equity investment is looked at from diverse viewpoints by different stakeholders. The choice to buy is a tough one. However, equity investing offers you a reasonable, self-governing, and well-organized opportunity to take part in that achievement. You might gain a definite advantage from well-prepared projections and plans that include: pro forma statements, cash budgets, and capital investment examination, and capital source studies.