When seeking investment from friends and family, having a clear and legally binding investment agreement is crucial to protect all parties involved. An investment agreement outlines the terms, rights and responsibilities between the company raising funds and the investors. It brings clarity to the investment process and manages expectations on both sides. Here are some key elements that a friends and family investment agreement should include:
Clearly define the investment amount and type of shares issued
The agreement should specify the exact investment amount provided by each party and the class of shares or percentage of equity they will receive in return. Common share types are common stock, preferred stock, convertible notes, SAFE notes, etc. The agreement should also include the company valuation and share price.
Outline governance and voting rights
The agreement should define shareholder voting rights, board seat appointments, attendance and voting at shareholder meetings, etc. This ensures clarity on the level of control and decision making granted to the investors.
Set expectations on returns
While friends and family will likely invest at more flexible terms, the agreement should still set expectations on financial returns or exit strategy. This includes dividend rights, liquidation preferences, redemption rights, etc. Setting clear return expectations prevents future conflicts.
Define information and management rights
The agreement should specify what information and financial reports investors have access to. This ensures transparency and that investors are kept updated on company progress. Rights relating to management, control, and corporate actions should also be outlined.
Outline investment restrictions
The agreement can impose investment restrictions to protect founders’ interests, such as limiting majority control, board seats, specific investor rights, etc. This prevents investors from taking too much control.
A robust investment agreement protects both founders and investors in a friends and family funding round. Founders should ensure the agreement reflects the informal nature of such investments while protecting personal relationships from disputes down the road.