Jump to Section
Need help with an Investment Contract?
Post Your Project (It's Free)
Get Bids to Compare
Hire Your Lawyer
What is an Investment Contract?
An investment contract is a legal document between two parties where one party invests money with the internet of receiving a return. Investment contracts are regulated by The Securities Act of 1933. In order for a contract to be considered valid to this category it must contain the following elements which are laid out by the Howey test:
- An investment of money
- A common enterprise
- Profit expectation(s)
- Derived from the efforts of others
Although the Howey Test it is not the sole testing method available it is the most common resource relied on to confirm that an investment contract meets the criteria of a security.
Types of Investment Contracts
There are multiple types of investment contracts but the ones most frequently drafted consist of the following:
- Stock Purchase Agreement – This type of contract is one of the simplest but involves a ton of documentation since it is for investments that are not publicly traded.
- Non-statutory Stock Option Agreement – Sometimes referred to as nonqualified stock options, this type of contract is opted for when investments are sought by investors or workers within a company. No formal requirements exist for this choice.
- Statutory Stock Option Agreement – Known as ‘incentive’ or ‘qualified’ stock options, this type of contract is under the regulation of the Internal Revenue’s Code. Although there are strict requirements for this option the tax benefits make it worthy.
- Convertible Debt Agreement – This type of contract is known for its creativity of allowing an investor to loan money to a company and be repaid later or gain ownership interest. Three specific types of convertible agreements are listed here:
- Convertible Note – A convertible note is a short-term debt that can be converted into equity in the issuing company. In this case, an investor loans money in exchange for shares.
- Convertible Promissory Note – This note converts debt to equity at a designated point in time, depending on the agreement.
- SAFE Note – A SAFE Note is a convertible security that acts reflective of an option by allowing an investor to purchase shares at a future price. This is not an actual debt and does not accrue interest.
- Restricted Stock Agreement – A restricted stock contract is one that does not make it feasible for an investor to gain ownership interest. Investors of this nature are expected to dedicate time and efforts to maintain existing interest.
- Deferred Compensation – While this is not an outright type of investment, a contract of this category is seen as investing by employees because ownership or pay increases are anticipated for the future.
- Royalty, Commission, or Percent of Revenue – This type of contract is more for individuals who do not wish to have ownership of the company itself but would rather invest in its profits or products.
To view examples and detailed descriptions of investment contract types read this article .
See Investment Contract Pricing by State
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Colorado
- Connecticut
- Delaware
- District of Columbia
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Minnesota
- Mississippi
- Missouri
- Montana
- Nebraska
- Nevada
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- Rhode Island
- South Carolina
- South Dakota
- Tennessee
- Texas
- Utah
- Vermont
- Virginia
- Washington
- West Virginia
- Wisconsin
- Wyoming
Key Terms in an Investment Contract
While investment contracts can be very broad and constitute a unique variety of terms and phrases, there are several commonalities listed below.
- Shareholder – A party having a portion of ownership in a company in the form of shares.
- Investor – A party who invests in a company by putting forth money or other financial resources. Investors give to the company with expectations of receiving back.
- Investment – Something of financial value given for the purpose of reaping benefits thereafter.
- Recitals – Recitals are the specific details of the applicable agreement, including investments intended to be made.
- Agreements – Agreements listed in the contract dictate all the terms and conditions agreed upon. This is the lengthiest portion.
- Milestones – Milestones are parts of the investment process broken down into smaller areas and timeframes. One milestone must be achieved to get to the next.
- Warranties – Warranties are representations made by a company to an investor that state truths and facts pertaining to the investment. If it is discovered the warranties were misleading or false then an investor can take action based on these.
- Restrictions – Restrictions written in an investment contract will describe the ways in which the investor is limited as to their ownership, shares, or other role in the company.
- Confidentiality – The confidential assertions made in the contract will mandate that the agreeable parties keep information related to the investment private.
Read this article to learn more about key terms that are often placed in investment contracts.
Return on Investment (ROI)
It is likely an investment contract exists if a party invests money into a business without having a direct role in the processes carried out. This party becomes known as an investor and when an agreement is entered into regarding an enterprise a return on investment (ROI) is expected.
It is an absolute necessity that you notate in the contract when the ROI will be disbursed. This will prevent you from having to wonder when the right time is to reach out to about a ROI and will also allow you to inquire about it at a reasonable time. There is more than one formula used to calculate ROI so it is wise to disclose the version that will be used for the exact agreement being focused on.
The most likely formulas to be used are shown here:
- ROI = Net Income / Cost of Investment
- ROI = Investment Gain / Investment Base
A good way to view ROI and determine the best way to make a calculation is to think of the applicable benefit divided by the cost. An investor should be curious of businesses ROI because it signifies the value of the investment being decided on.
Here is an article detailing ROI.
Image via Pexels by MayoFi
How To Write an Investment Contract
Professionally and diligently writing an investment contract is highly recommended due to the legal stipulations it creates. Writing an investment contract can be simplified by examining related samples and including all the content listed below:
- The names and addresses of interested parties
- The general investment structure
- Purpose of the investment
- Effective date agreed upon
- Signatures by both/all parties
It is important to clearly state in the contract what you as the investor will be providing and in what form as well as when the investment will be activated. Whether investments will be transferred in the form of cash, check, assets, or wire transactions should be asserted. It is vital to ensure inclusion of all the specifics in the contract no matter how trivial they may seem so that there is no confusion or disputes that arise later.
It would be useful to follow these steps when writing your investment contract:
Step 1: Designate the first section to name the parties involved and link them to the proper titles.
Step 2: The legal terms such as ‘whereas’ and ‘therefore’ should be listed when describing the investment and claiming that the parties agree of the material that follows.
Step 3: The body of the agreement should contain headings and sections reiterating prior discussions of how the investment will be set up and put into action.
Step 4: Once the basics are incorporated into the contract, the terms of payment should be written.
Step 5: Milestones that apply should be spelled out with their due dates mentioned.
Step 6: The start, duration, and end of the agreement should all be touched on along with unplanned termination aspects.
Step 7: Company points of contact, legal jurisdiction, and signatures serve as appropriate conclusive sections.
Here is an investment contract example .
Getting Help With an Investment Contract
If you are thinking of writing an investment contract and need assistance, fundraising lawyers and/or securities lawyers are well suited contacts.
Here is an article that provides insight as to the competency of these attorneys for investment matters.
Meet some of our Investment Contract Lawyers
Garrett M.
Hello! I am a young attorney with four years' experience in real estate transactions, fund formation, and general corporate transactional work. I graduated in 2016 from the University of Texas - Austin and I am barred in Texas.
Billy Joe M.
I graduated from the University of Illinois at Urbana-Champaign in 2006 with a degree in Political Science, Finance, and Economics. I stayed around Champaign for law school and graduated in 2009. I then worked at a big law firm in downtown Chicago. It was boring, so I quit in early 2011. I thought that I could not be happy practicing law - I was wrong. After I quit the traditional law firm life, I began representing my own clients. I realize now that I love helping normal people, small business owners, and non-profits address a variety of legal issues. I hope to hear from you.
Phocus L.
G'day, my name is Michele! I work with startups, entrepreneurs and small/medium-sized businesses across the country in a wide array of industries. I help them with all of their ongoing, daily legal needs. This includes entity formation, M&A, contract drafting and review, employment, asset sale & acquisition, and business sales or shareholder exits. I'm half-Australian, half-Italian, and I've lived the last 20+ years of my life in America. I've lived all over the USA, completing high school in the deep south, graduating cum laude from Washington University in St. Louis, and then cum laude from Georgetown University Law Center. After law school I worked for the Los Angeles office of Latham & Watkins, LLP. After four intense and rewarding years there, I left to become General Counsel and VP of an incredible, industry-changing start-up called Urban Mining Company (UMC) that manufactures rare earth permanent magnets. I now work for Phocus Law where I help run our practice focused on entrepreneurs, startups, and SMEs. I love what I do, and I'd love to be of help! My focus is on providing stress-free, enjoyable, and high-quality legal service to all of my clients. Being a good lawyer isn't enough: the client experience should also be great. But work isn't everything, and I love my free time. I've been an avid traveler since my parents put me on a plane to Italy at 9-months old. I'm also a music nut, and am still looking for that perfect client that will engage me to explain why Dark Side Of The Moon is the greatest album of all time. Having grown up in a remote, and gorgeous corner of Australia, I feel a strong connection to nature, and love being in the elements.
August 28, 2021
Gerald W.
My clients know me as more than just an attorney. First and foremost, my background is much broader than that. Prior to attending the Valparaiso University School of Law, I earned a Master of Business Administration and ran a small business as a certified public accountant. Thanks to this experience, I possess unique insight which in turn allows me to better assist my clients with a wide range of business and tax matters today. In total, I have over 20 years of experience in financial management, tax law, and business consulting, and I’m proud to say that I’m utilizing the knowledge I’ve gained to assist the community of Round Rock in a variety of ways. In my current practice, I provide counsel to small to medium-sized businesses, nonprofit organizations, and everyday individuals. Though my primary areas of practice are estate planning, elder law, business consulting, and tax planning, I pride myself on assisting my clients in a comprehensive manner. Whenever I take on a new client, I make an effort to get to know them on a personal level. This, of course, begins with listening. It is important that I fully understand their vision so I can help them successfully translate it into a concrete plan of action that meets their goals and expectations. I appreciate the individual attributes of each client and know firsthand that thoughtful, creative, and customized planning can maximize both financial security and personal happiness. During my time as a certified public accountant, I cultivated an invaluable skill set. After all, while my legal education has given me a deep understanding of tax law, I would not be the tax attorney I am today without my background in accounting. Due to my far-reaching experience, I am competent in unraveling even the most complex tax mysteries and disputes. My CPA training benefits my estate planning practice, too. In the process of drafting comprehensive wills and trusts, I carefully account for every asset and plan for any tax burdens that may arise, often facilitating a much smoother inheritance for the heirs of my clients. Prior to becoming certified as a CPA, I made sure to establish a solid foundation in business both in and out of the classroom, and the acumen I’ve attained has served me well. Not only am I better able to run my own practice than I otherwise would be; I am able to help other small business owners fulfill their dreams, as well.
September 3, 2021
James David W.
I graduated from Harvard Law School and worked first for a federal judge and then a leading DC firm before starting a firm with a law school classmate. My practice focuses on company formations, early-stage investments, and mergers & acquisitions.
November 11, 2021
Anna K.
Anna is an experienced attorney, with over twenty years of experience. With no geographical boundaries confining her practice, Anna works on corporate, healthcare and real estate transactions. Anna brings extensive big firm experience, garnered as an associate in the Miami office of the world's largest law firm, Baker and McKenzie, and the Miami office of the international law firm Kilpatrick Townsend. Her areas of expertise include: mergers and acquisitions, initial public offerings, private placements, healthcare transactions, corporate finance, commercial real estate transaction and acting as a general corporate counsel. Anna is certified to practice law in Florida and was admitted to the Florida Bar in 1998. Anna is also a Certified Public Accountant. She passed May 1995 CPA Exam on the first sitting. She is fluent in Russian (native).
September 22, 2021
Serge Y.
Startup Lawyer that caters to the entrepreneurial spirit. Focusing on building long term relationships and working with emerging startups throughout their entire life cycle. From concept to IPO, I'll will help guide you along the way. Years of high level experience drafting, negotiating, and reviewing all types of transactional contracts, e.g., operating agreements, charters, bylaws, NDAs, Terms of Service, Master Service Agreements, etc. You name it; it's crossed my desk. Have a depth of experience working with the USPTO to file trademarks, copyrights, and patents. If you're in the startup space and need a helping hand, I'm your guy.