An investment agreement: What it is, and how to write one

Once you’ve secured a term sheet and walked through the due diligence process, get ready for an investment agreement. The main task of this document is to legally bind you and the investor and to finalize the deal. 

Building your business on shaky agreements means building it on borrowed time—sooner or later, you’ll have to reconsider and rewrite them or risk losing your time, money, and company growth.

We’ve prepared this guide to help you learn what an investment agreement is, how to write one, which types of contracts exist, and what to do to negotiate better terms with investors.

What is an investment agreement, and why do startups need it?

An investment agreement (aka investment contract or investor agreement) is a document that legally binds you (a startup) and an investor and details the terms and conditions of an investment transaction, along with the rights and obligations of both parties. 

You might think of it as your startup’s prenup—where all the details of your “marriage” are clearly stated and legally certified. An investment agreement typically covers how much money investors are injecting into your company, what they get in return, and the specific rules of your future relationship. 

Don’t think that an investor contract is mere paperwork—this is actually the rulebook for the game you’re going to play. It typically comes as a final step before you officially get money from the investors and close the round. That’s why it’s so important not to miss a single clause. When at the term sheet stage, you negotiate high-level terms, but here, you finalize them; that’s why you must be fully confident in every tiny detail.

Note that for some deals like SAFEs or convertible notes, the investment agreement itself might be the first formal document.  

A robust investment agreement protects (both you and the investor), minimizes disputes down the road, and makes your cooperation clear and trust-driven. And, more importantly, it makes raising money much easier later, as you’ve already done things right from the start. 

Types of investment agreements

There are various types of investment contracts, and this primarily depends on the type of investment you’re going to secure. Here are some common investor agreement options you may come across:

1. Stock purchase agreement (SPA)

2. Convertible debt agreement

3. Simple agreement for future equity (SAFE)

4. Preferred stock agreement

5. Royalty/Revenue-based agreement

Let’s elaborate on each of them.

Stock purchase agreement (SPA)

This is probably the simplest way to bring investors into your company—they give you money, and you give them shares (clear as day). You just need to decide your company’s valuation before so that you can point out in the investment contract how many shares investors get and at which price. 

Convertible debt agreement (aka Convertible note)

Here, things get a bit more complicated. You don’t need to put your valuation early because you get the money as a loan that will convert into equity (shares) during your next funding round (your valuation will be set here). When using convertible debt agreements, investors typically get a discount on the future share price—a so-called reward for helping get off the ground. As this type of investment goes as a loan, it typically comes with interest rates and a maturity date.

Simple agreement for future equity (SAFE)

This investment agreement is a simplified version of convertible notes. Here, you have neither interest rates nor maturity dates—only a clean way to convert the investment into equity during the next funding round. A SAFE may become the best choice for early-stage startups, as it’s clear, simple, and understandable by most investors.

Preferred stock agreement

This is the heavyweight of investment agreements that is commonly used in venture capital rounds. Why the heavyweight? It puts investors first and gives them much power and control over the situation. Picture this: they get paid first if the company sells, have a bigger say in major decisions, and their shares get protected from losing value in future rounds (anti-dilution protection). If you’re wondering, “Why would I ever choose this type of investor contract?” it’s simple—you will choose it if you want to score a high-value investment. However, if you’re still at an early stage, you’d better think of a different funding agreement, something less complicated.

Royalty/Revenue-based agreement

Unlike the previous investment agreements where you needed to give up equity, this one takes a different way—you agree to share a percentage of your revenue with investors until they get their return. It’s like paying a commission on your sales. But you should sell regularly to have steady revenue; otherwise, investors won’t get paid, and this could hurt your business and funding future. Although this business investment contract can be attractive for some companies (those that don’t want to dilute their ownership and have a regular cash flow), it’s quite rare in a traditional startup funding world.  

How to choose the right investment agreement 

If you want to know which investment agreement to choose, look at:

• Your startup’s stage: If you’re an early-stage company, better think of SAFEs or convertible notes; they are easier to manage and don’t need you to come up with a valuation early. 

• How easy it is to value your company: With a harder valuation, convertible instruments make more sense.

• Your revenue situation: Steady revenue? You can go with a royalty agreement. If not, better think of other types.

• How much control you’re ready to give up: If you’re ready to share your control over the company, choose a preferred stock agreement; otherwise, SAFEs or convertible notes will be a better option. 

• Your exit strategy: If you plan to go in the long run and potentially target acquisition, equity investment agreements like preferred stock will work better in this case.

The most important thing here is to have a vision of your startup’s future. When you know where you’re going, it becomes easier to decide which type of investment you need at this particular time as well as which investment agreement to choose—whether to use a specific type for each round or mix different types within the same round.

What to include and how to write an investment agreement?

Till now, we’ve talked more about theory, but it’s time to get practice—specifically, what you need to have an investment agreement in place. 

Note that the startup, the investor, and the legal experts work together on the investor contract. While the startup and the investor suggest and negotiate the terms and conditions, the corporate or startup lawyer drafts, reviews, and finalizes the document and checks it in accordance with all the relevant laws and regulations.  

This is what an investment agreement includes on average:

1. The basic stuff: How much money you’re getting and when, the type of investment (shares, loan, SAFE, etc.), and company valuation (if you’re doing an equity round, but for loans or revenue-sharing agreements, it’s not applicable).

2. Investor rights: Can they have a say in major decisions? Do they get a board seat? What information should you share with them? Are they first in the line for future funding rounds?

3. Startup obligations: Reports you need to provide, how you plan to use the funds, and which decisions you need to negotiate with the investor.

4. Exit strategy: What to do if the company sells, enters an M&A deal, or liquidates? How can investors walk away? Who gets paid first if things go bad?

5. Specific provisions: These are some optional clauses such as anti-dilution, pre-emptive rights, or confidentiality. Why optional? Because they typically depend on the type of the finance agreement.

Once you know the main clauses, here are some steps on how to write an investment agreement:

1. Have your terms and conditions in place. Based on the information from your term sheet, write about the type of investment, how much money you raise, valuation (if applicable), and any valid ownership details. 

2. Include investor rights and company obligations. They must be clearly stated and negotiated, as your future cooperation with the investor will be managed under this document.

3. Determine key provisions like governance structures, dividend policies, exit strategy, and confidentiality terms. Note that the types of provisions depend on the investment type; that’s why they may vary.

4. Add protective clauses. You need to point out how you’ll solve any disputes or whether there are any specific conditions to be met before the investment agreement is finalized. 

5. Legally finalize the contract. As mentioned before, a corporate or a startup lawyer typically helps with the legal side of the deal. In the US, investment agreements must comply with the Securities Act of 1933. If your investment has securities, you have to run your document via the Howey Test. In such a way, you make sure your investor contract is valid. However, not all agreements should take this test-check. For example, SAFEs aren’t on the list as they aren’t securities in the traditional sense but rather a promise for the future.

Remember that an investment agreement typically finalizes the terms and conditions determined in a term sheet and legally binds the two parties—you and the investor.

Tips on how to negotiate an investment agreement between the two parties

Based on our experience helping more than 1,000 clients close funding rounds, we can admit that there’s no one-fits-all investor agreement template or investment contract sample you can use to craft yours in seconds. Sure, you can find lots of templates (on the official website of the US Securities and Exchange Commission, for example, or simply google them). However, you’ll need to adapt any of the investor contract templates to suit your needs, and here are some tips on how to make it work for you.

Know your must-haves

As the investment agreement stage is the final step to seal your deal with the investor, you must pay much attention to every detail, every clause, and every provision of the contract (for instance, liquidation preferences, anti-dilution clauses, voting rights, etc.). You and the investor must know which clauses and provisions are non-negotiable and which can be flexible. Many startup founders who have already dealt with fundraising really want to pay it forward, so you may ask them to know the pitfalls of the whole game.

Think beyond the “now benefit”

Your investment agreement can also prepare you for future funding rounds. That’s why you need to think about the terms that may influence your fundraising later on—for example, pro-rata rights or restrictions on diluting founder equity. Don’t only think about how* to write an investment agreement*, think more about how to build a lasting relationship with investors so that you can benefit from it in the future. 

Ask for legal help

When it comes to a business investment contract, there’s no time for DIY. Not using professional legal support can cost you an arm and a leg in the future (and we’re talking not only about the money but also time, potential disputes, spoiled relationships with the investors, and possible growth gaps in the future). That’s how the right legal base is important. Don’t wait until problems arise; try to prevent them from day one—ask a good lawyer to walk your investment agreement sample and you through the negotiation process and deal closure.

Wrap-up on the investment agreement

Remember that an investor agreement is not just “one more document” to craft—it’s a legal and official foundation for getting money from investors and building the future of your startup, especially if you plan to go more rounds. 

A poorly-written and poorly-negotiated investment agreement can cause you many problems down the road—from disputes with investors to barriers in future fundraising. That’s why it’s best to settle all the terms and conditions from day one, be attentive to each detail and have the right legal support. 

If you need help crafting an investment agreement, a pitch deck, or fundraising in general, contact our Waveup team. We are here to help you!