Investing is a practical way to put income to work to generate wealth in the future. It allows the money to outpace the possibility of inflation and increase its value. There are many reasons to consider investing money. In investing, there are higher investment returns, produce better retirement plans, better tax efficacy, beats inflation, helps in achieving the financial goals of an individual. When planning to engage in investing, it is critical to write an investor agreement. What is an investor agreement, and what is the benefit of having one? The article provides valuable information about the agreement, including its definition, components, and a step-by-step process of creating one. A section also answers frequently asked questions regarding the document.

What Is an Investor Agreement?

An investor agreement comes in many names, including investment agreements, investor contracts, or investment contracts. The document is a binding document between two parties where one party invests money intending to receive something in return. For businesses engaging in an investor agreement, it is a contract between a company along with its shareholders and an investor for an investment proposal in the company. The investor planning to invest in the company can be an existing shareholder of the company and can have an active shareholder’s agreement with the company during the pre-investment stages or an entirely new investor. An investor can also be a representative of a group of investors. The terms and conditions in the investor agreement depend on the type of allocation an organization demands from an investor. The nature of the funding arrangement also dictates the bargaining power of involved parties when negotiating the investor agreement.

According to the statistical data coming from Statista regarding the share of Americans investing money in the stock market from 1999 to 2021, about 56 percent of American adults have investments in the stock market. The numbers continue to rise at a steady pace starting from 52 percent back in 2016.

Components of an Investor Agreement

Similar to most legal documents, there is no one format for writing an investor agreement. Some terms and conditions apply to one arrangement between parties, while others have an entirely different arrangement. Nonetheless, most investor agreements have similar provisions or sections that must always be present to make it a legally binding and enforceable document. The section below covers the general provisions that an investor agreement must contain, including descriptions of each one, to create a comprehensive agreement between parties.

Involved parties: All the existing shareholders of the company, its founders, and the company as a whole, form part of the involved parties of the agreement. As the investor agreement tackles the deal subscription of shares coming from the investors in exchange for monetary value, the investor agreement also binds these investors and other separate funds they are investing in. The section also requires any transfers or allotments to enter a deed of adherence that treats new shareholders as part of the original party, bound by similar provisions in the investor agreement. The board also has the discretion to waive the requirement.Tranche payments: When it comes to investments, companies perform tranche payments in which the amount grows against agreed terms of milestones. The measurement of these milestones relies on the different stages of development of one or more products, new developments, and the result of pre-clinical and clinical stages. Investors can also waive milestones and other completion provisions if the company fails to achieve promised developments.Completion conditions for initial tranches: Investors formulate the fulfillment of specific conditions before implementing initial tranches of the investment, leading to its completion. The conditions include the fulfillment of due diligence, availability of a comprehensive business plan, and acquisition of required tax clearances. It must also indicate the necessary individuals for issuing new shares and new articles in the agreement. However, these require resolutions that can impact the investment. It must also state the founders and key stakeholders that have shares or options, intellectual property provisions from the company or its founders, and appropriate insurance.Initial tranche completion mechanics: The section indicates the actions that correspond to the completion of initial tranches. It includes the approval of the investor agreement and disclosure letter, issuance of subscription certificates, appointment of the investor director to the board, investor obligation for subscription fees, approval and execution of service agreement, and the adoption and commitment of applying a share plan. The investment proceeds must translate into the agreed milestones and manifestation of the business budget or business plan.Completion conditions for subsequent tranches: The completion condition for subsequent tranches include the completion of initial investments, lack of adverse changes, achievement of identified milestones, and no material breach of the contract. There must also be continuous employment of the shareholders, and the company must not have any insolvency instances.Subsequent tranche completion mechanics: The section lists the implemented actions to complete subsequent tranches of the investment. It includes the issuance of new shares and certificates to new investors and the obligation of investors to pay subscription fees to the bank.Warranties: It is very common for investors to ask a company for warranties regarding the current performance and status of the organization to mitigate the risks of the company being unattractive. A warrant statement indicates the facts or circumstances of a company for a specific period. If the warranty turns out to be untrue, the investor covered by the warranty can claim damages upon suffering losses. There are instances investors negotiate the damages in the agreement payable in the occurrence of a breach of warranties. The payments are genuine pre-estimates of the loss from the warranty breach to make the process quicker and more efficient. Investors have the bargaining power to ask for the recurrence of warranties during the signing of the agreement. It gives investors protection before the distribution of shares. The bargaining power can also produce an exit route for investors if there is a material adverse change in the organization. The company can also indicate a limit for warranty claims and the additional liability of directors and management. Board representation: An investor has several shares that entitle them to have representation during board meetings or observe these meetings. Depending on the content of the shareholder’s agreement or articles of association, the investor can appoint one or more directors during or following an investment as investor directors to fulfill the validity of meetings. Directors can also decide on reserved matters. These reserved matters refer to decisions and strategic actions that require the consent of investor directors, also giving them veto rights. The board of directors must think about providing specific powers to investors. Giving investors particular powers and rights makes it harder to run and operate the company to achieve the overall organizational strategies. The cost of large investments is sharing management decisions with investors, and it is also applicable to well-versed investors if and when the company allows it.Restrictive covenants: The investor agreement can also indicate promises, known as restrictive covenants, in exchange for the investment stating that the company management will not compete with the organization or prevent key personnel from leaving to join competitor companies within a period after the investment. The covenant is similar to a non-compete agreement in employment terms. It also protects the investor from value deterioration of investment due to the quality of management or the trading and commercial power of the company after investment.Confidentiality statements: Before signing an investor agreement, the company can ask the individual investor to sign a separate confidentiality agreement. It ensures that the parties keep their word in implementing confidentiality provisions to protect sensitive information, cover responsibilities on presenting announcements, and publish information about the agreement or investment procedures. Some regulations require compliance measures and must be incorporated into the investor agreement without the consent of the other party to fulfill statutory regulations.Exit strategy: The last section of the investor agreement is the exit strategy. It prepares the investor for cases of disputes between the two parties or if the investor wishes to pull out investments or stop investing. The investor agreement must indicate what happens to the shares, whether they are transferred to shareholders, the company, or a third party. It must also detail the process of returning funds if the company becomes insolvent. Parties can plan for exit if the company is on the stock exchange list or for private sale for a period. There must also be provisions governing the outcomes upon the purchase of the company.

How To Write an Investor Agreement

When writing the investor agreement, make sure that the provisions, terms, and conditions show a clear representation of the interests of both parties. Keep in mind that the investor will want to ensure their protection, the organization wants to guarantee there is a smooth transaction when delivering funds and shares, and the founders secure their stakes in the joint venture. The section below provides a step-by-step process to create a comprehensive and enforceable agreement.

  • 1. Indicate the Opening Recitals and Whereas Statements

    The opening recital indicates the date of signing the agreement, including the names and addresses of the parties participating in the investment. Write the company name and business address, since the contact information will be in another section of the investor agreement. The whereas statement describes that the first party seeks to invest in the venture and that the second part provides the investment funds. The ‘therefore’ statement follows the whereas statement that says the parties agree to the provisions.

  • 2. List All the Articles of the Agreement

    The articles contain everything that the parties agree on and discuss that becomes part of the written investor agreement. Write the articles one at a time, with them appearing on the document in a numbered format. The sections of the agreement typically include the amount of investment, the investment plan, and the outcomes that the investor can expect in exchange for their contributions.

  • 3. Incorporate the Payment Terms

    Payment terms vary from one company to another, depending on the amount of investment that a company receives. In most cases, there is a lump sum payment, and the agreement must indicate the transfer amount, date received, and bank account details. If the investor chooses to make several payments, make sure to refer to attachments that contain information about the dates and other banking information.

  • 4. Identify Deliverables Between the Parties

    There are certain benchmarks that the parties must reach on a specific date or goods that companies must produce after performing company activities. List all the deliverables that the parties promise and their due dates.

  • 5. Specify the Contract Terms and Termination Provisions

    The contact term refers to the duration of the investor agreement. It details the length of time that the investor makes their contributions while receiving the return on investment or ROI. On the other hand, the termination identifies the procedures and situations for ending the contract.

  • 6. Choice of Law, Contact Information, and Signatories

    Since laws differ from one location to another, the investor agreement must indicate the area of jurisdiction that covers the contract. As mentioned earlier, the contact information lists the name, address, title, contact numbers, email address, and other necessary information about the parties. Finally, the signatories must sign the contract to make it legally binding. There must be a witness to notarize the signatures of the parties.


How do investor agreements work?

Investor agreements are legal documents wherein one party invests money over a period or a full amount with the intent of receiving a return on the investment.

Can an LLC take investors?

A limited liability company or LLC can bring investors into the company or organization to raise funding.

What is a funding agreement?

A funding agreement is a business document between an investor and an issuer, wherein the investor provides a lump sum payment and the issuer guarantees there is a fixed ROI for a specific term.

When engaging in any investment activity, the investor agreement becomes a necessity. Through the document, both parties can establish a clear set of responsibilities and expectations from the joint venture. Companies need to encourage investors to partner with their companies. Investors are significant in the business sector, and companies must maintain a harmonious and transparent relationship with them. Ensure that an investor and a company have clear documentation of the arrangement through an investor agreement. Download an investor agreement for the organization by browsing through the 9+ SAMPLE Investor Agreements in PDF | MS Word only from!