Investment agreement

Hey startup family!

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Can you believe it’s December already? With the end of the year in sight, it’s almost obligatory to reflect on everything we’ve built and gear up for what’s ahead. But before the holiday cheer takes over, let’s dive deeper into the world of fundraising - today, we’ll talk about the investment agreement, a document that turns a handshake into an official partnership. Ready to explore? Let’s go.

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What’s an investment agreement?

An investment agreement is the formal contract between the company and its investors. As you might remember, a term sheet is a non-binding document that outlines the big-picture terms, like how much funding you’re getting and how much equity you’re giving up. In contrast, an investment agreement dives into all the details. It explains how corporate decisions will be made, when investor approval is needed, and outlines roles, responsibilities, and investor protections, like anti-dilution clauses. Think of it as the rulebook that turns initial terms into a working partnership.

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Why does this matter?

An investment agreement isn’t just a legal must-have, it’s your safety net and growth driver. Here’s why it matters:

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‍Secures the deal: Lays out the key terms, like how much equity investors own and when they have a say, so there’s no confusion later. For example, it can specify that investors need to approve raising more funds but not day-to-day decisions.

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Keeps everyone on the same page: Sets clear expectations, like how profits will be shared or reinvested, and avoids misunderstandings about who’s responsible for what.

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Gives you room to grow: It helps your business scale without unnecessary restrictions. A good agreement gives investors the oversight they need without slowing you down.

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Dos and don’ts

Here are a few tips to make your investment agreement work for you:

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Dos‍

• define how much equity each investor gets and address past equity commitments
• balance investor rights with founder guarantees (and take into consideration how much equity you’re giving away)
• keep control of the exit strategy so you’re not forced to sell early

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Don'ts

• skip important market-standard investor protections like anti-dilution clauses and liquidation preferences
• give investors approval rights over routine decisions like hiring or making small operational changes
• agree to vague or excessive founder restrictions like lock-ups or non-compete clauses

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In a nutshell

The investment agreement is the last piece of the puzzle. It locks in key decisions, like how profits will be shared, when investor approval is needed, and investor protections like anti-dilution clauses. It also outlines roles and responsibilities, so everyone knows their part. By keeping expectations clear and balanced, it helps you avoid conflicts and gives you the freedom to focus on growing your startup.

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Want to learn more about investment agreements or other investment-related topics? We’re here to help! Reach out to our team or follow us on LinkedIn for more insights.

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Thank you for being part of our journey this year. We’ll be back in January with more insights and updates to help your startup thrive. Enjoy the holiday season.

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See you next year!