When raising funds from friends and family for a new business venture or investment opportunity, it is important to have a formal investment agreement in place. A well-crafted agreement protects both parties and sets clear expectations. This article will provide an overview of key considerations when preparing friends and family investment agreements, including defining investment terms, outlining rights and responsibilities, addressing potential risks, and finding agreement templates and examples to reference. Properly documenting investment agreements with friends and family through a formal contract can help mitigate disputes down the road and preserve important relationships.
Clearly define investment terms like amount, equity, and timeline
The investment agreement should clearly spell out the specifics of the investment so there is no confusion, such as: the total amount being invested, the percentage equity or ownership stake received in exchange, the investor’s role in company operations, and the expected timeline for repayment or exit. Defining these terms upfront aligns expectations and minimizes potential misunderstandings later on. For example, if a friend invests $50,000 and receives 10% equity, this should be explicitly stated. Timelines for repayment, projected returns, and exit options should also be addressed.
Outline rights, responsibilities and decision-making authority
In addition to defining the investment itself, the agreement should delineate the rights and responsibilities of each party, plus decision-making authority when applicable. Will the investor receive voting shares or have input on business decisions? Are there any limits on the investor’s involvement? Rights related to company information, financial reports, and business updates should be detailed as well. Clearly delineating rights and responsibilities sets the stage for an optimal working relationship.
Address risks and plan for resolution of potential disputes
Even with close friends or family, there is still investment risk and potential for disagreement. The contract should have provisions for addressing conflicts or violations of the agreement. Additionally, it helps to outline possible dissolution scenarios and buyout terms. Including dispute resolution clauses and risk planning upfront provides a roadmap if issues arise down the line. Both parties can enter the investment with clear procedures in place for navigating challenges while preserving the relationship.
Leverage templates and examples to create a customized agreement
When drafting a friends and family investment contract from scratch seems daunting, there are resources available to reference. Many legal sites provide templates and sample agreements to model after. However, any agreement should still be customized to reflect the specific situation rather than just copying a generic template. Consulting a legal or financial advisor can also help ensure the agreement is comprehensive and enforceable. With proper diligence and planning, investment contracts with friends or family can provide clarity and protection.
Formalizing friends and family investment agreements through well-crafted contracts outlining terms, rights, risks, and procedures can help safeguard relationships and mitigate potential conflicts down the road.