You started your small business on your own, and it has performed very well. You’ve had enough success to do it full-time. You’re excited about the future growth that is possible.
To promote that growth, you’re going to bring on a new investor. They believe in your vision and they have the money to help you take it to the next level. Do you need to use a contract with that investor, or can you just shake hands and cash the check?
Utilizing a funding agreement
You certainly would be best off to have a contract in place so that all parties involved know exactly what to expect and what obligations they have. One type of contract that is often used in this situation is known as a funding agreement.
The funding agreement starts by outlining how much money is going to be invested and what type of return the investor can expect. You may tell them what percentage they’ll earn overtime or when they should expect to get their money back with interest. Essentially, you’re showing them why it’s a wise move to invest in your company.
That said, your contract may also want to address other aspects. It may need to note how you’re going to use their money so that they understand what you’re doing with their capital. If you’re selling them ownership in the company, you certainly want to address what percentage of ownership they have and what that means for their role with the business.
The future of your company depends on getting this right, so make sure you are well-versed in all of the legal steps you’ll need to take.