A Brief Introduction About the Investment Contract
As the name suggests, the Investment Contract is proof of an investment made by a party in the exchange of profit. Such an agreement secures the basic interests of both the parties involved. For instance, if you are a small business looking for investors, by providing the shares of your company, you can get into an Investment Contract with the investor. The agreement will outline the details of an investor’s investment and profits.
The Investment Agreement is also used to avoid conflicts and confusion between shareholders. By signing such an agreement, the parties involved remain aware of important questions such as how many shared each party holds, who manages the business, what percentage of profit is for the investor, etc.
For small businesses or real estate businesses, and Investment Contract can be of enormous help. The agreement used in this latter situation is known as Real Estate Investment Contract. With the help of this agreement, they can bring more prominent investors. Apart from profits, does the investor hold any other responsibility or duty, the transaction must always specify.
Other names for the Investment Contract are Investment Agreement and Shareholders Agreement.
Who Takes the Investment Contract?– People Involved
Investment Contract or Investment Agreement is signed between the party who is making an investment and the party whose business is accepting such an investment. The investment can be in cash, money, or shares. There is no restriction on how the investment is made.
Generally, small to large businesses or real estate companies sign an Investment Agreement with investors to receive money for the business and to share profit with the shareholder or investor.
Purpose of the Investment Contract – Why Do You Need It?
The primary purpose of an Investment Agreement is to make sure that the details of the investment made are documented and are legally bound. It also reduces the chances of conflicts and confusion between the parties involved. In case of any breach or violation, both the parties can refer to the terms and conditions or the governing laws of the state to resolve a dispute.
This agreement protects the fundamental rights of both parties by giving them written proof. Investors who invest in more than one small business can’t always keep track of where their money is flowing. Such agreements help investors in keeping track of their investments and their expected returns.
Here are the purposes of The Investment Contract in pointers –
- It is required if you are a small business and you want to bring in investors
- It is required if you are investing in a company and want to protect your investment
- It specifies the details of the relationship between the company and the investor
- It lists down all the terms and conditions
- It makes sure there are no conflicts in the future
- It invests a legally bound process
- It is required to answer all questions regarding an investment in a business such as who manages the business, how will the ROI be given, etc.
Contents of the Investment Contract – Inclusions
An Investment Contract or Investment Agreement must include basic details such as names, phone numbers, and addresses of both parties. It must include the date on which the agreement is being signed and also the date on which the agreement starts. It should further specify the amount of investment made by the investor. It must describe if the investment is through shares, cheques, or any other asset.
Investment Agreements should further specify how the returns will be paid to the investors. When and how these payments will be made, what will be the interest rate if applicable should be written in the agreement. The agreement must make risks evident and comprehensible to both the parties.
By doing so, the company is telling the investor as to what to expect. Are there any conditions for the ROI, the agreement must answer this as well? It should also say to the investor if he holds any duty or responsibility in the company. The agreement must specify in what circumstances there will be no ROI at all.
For how long the agreement will be valid and how it will be terminated, the agreement must add these details in it. It will also have details of the governing laws and dispute resolution clause.
The agreement should also anticipate what happens if the company gets dissolved or goes bankrupt.
Will the investor be privy to confidential documents or information of the company, the agreement must answer this? In some cases, the investor may put such obligations. Hence, before drafting the agreement, both parties must discuss the terms and conditions in detail.
After proper discussion and understanding of all the obligations and responsibilities, both parties should sign the agreement.
How to Draft the Investment Contract?
The first thing that needs to be done by the involved parties is to know which kind of Investment Agreement they have to use. There are possibilities such as general Investment Contract, Stock Agreement, or Guaranteed Investment Contract (GIC). A GIC is an agreement between an investor and an insurance company where the insurance company provides a guaranteed ROI for keeping a deposit for a specific period.
A Stock Agreement is signed when the company gives its stock to a private investor. The agreement should be drafted in a way that it should protect both the business and the investor.
For a general Investment Agreement, both parties must discuss the details and obligations in person. The investor should specify his or her expectations very explicitly, and the company or business should set the expectations right. In most cases, the investors want to know everything about the business or the company before deciding to invest in it. It then becomes the company’s responsibility to keep things transparent and share details with the investor. The agreement should, however, have a clause for confidentiality so that crucial information about the company doesn’t leak.
These agreements are very crucial and important financial documents, so both the parties should structure and draft it properly, then read it and sign it in the end. A solid Investment Agreement will have all the basic details of both parties, all the details of the investment made by the investor, and details of the return (in percentage or otherwise) that the investor will get with proper timeline and mode of payments.
Negotiation Strategy
Negotiations are one of the most important aspects of an Investment Contract. Investors, before signing such an important piece of a financial document, often make sure that they are aware of its legality, obligations, responsibilities, and profits. Sometimes investors take the help of experts or lawyers to negotiate the terms and conditions of the contract. In such a case, the investor should make sure that the advisor is giving them maximum output or help. He must take you through each clause of the contract.
Benefits & Drawbacks of the Investment Contract
There are various benefits of investors investing in small or large businesses. Such deals benefit both parties involved. For businesses, it is a huge financial help, and for the investors, it is a beneficial deal in terms of money and shares.
Here are some of the advantages of The Investment Contract –
- By signing the agreement, a business gets equipped with the expertise of investor’s experiences
- The agreement specifies the investor’s role and responsibility in the company
- The agreement makes both the parties legally bound to keep the crucial information of each other to themselves
- The agreement makes clear how the investor will be paid and in what percentage
- It reduces the possibility of conflicts and confusions
- It enables the business owner to take risks and big steps for the growth of his or her business
- It works as a legal document or legal proof of the money given by the investors to the company
- In the case of any breach by either party, the agreement can be referred for dispute resolution
Here are some of the drawbacks of The Investment Contract –
- It involves the risk of losses for the investor
- May put pressure on the business owners
- Increases the responsibilities of both parties involved
- Complex financial piece of document for someone who can’t afford expert help
- The business owner may feel disturbance or too much indulgence of the investor
What Happens in Case of Violation?
As discussed above, an Investment Contract is an extremely crucial and sophisticated piece of document that needs the guidance of an expert or attorney. The agreement anticipates all sorts of disputes, breaches, or violations; thus, it contains a resolution method for each one of them. It also specifies the governing law, which helps both the parties understand the consequences of performing any default.
Both parties are well within their rights to approach the court since the court protects them by signing the agreement.
Termination of the agreement is another very crucial clause of the agreement that must be specified clearly in the agreement so that either party can terminate as and when required. Such terms and conditions are decided and drafted in the agreement only after a proper discussion between both parties.
An investor performs a due diligence process(1) before investing in any company or any business. The investor must be aware of the company’s whereabouts, and thus, he should first investigate all internal matters. However, he must also make sure that the company’s owners don’t feel like they are being interfered with or probed for no reason.
An investor must be fully aware of what he is getting in return and what form. The share value or the percentage of profits that he plans to achieve in the end should be appropriately communicated. Once the investor decides on what he plans to invest and signs the agreement, he can’t back off without legal some remedy.
Business owners must make sure that their investor qualifies to be investors as per state or country laws.
There are many templates available online, but the company or investors must be extremely cautious while picking one. We suggest a review of many template options.