Getting to Know Angel Investment Agreement Templates
What is an Angel Investment Agreement?
An angel investment agreement is an intricate detail of your startup financials. As a startup, getting funding often comes down to forging a connection with somebody who can act as your angel. Most people will structure this money exchange in very different ways than the average loan, because it’s often less about a credit score and more about a person’s belief in your business idea. However, no matter how closely these two parties work together with one another, there’s still going to be a number of loose ends among those agreements and payouts that will need to be tied together. An angel investment agreement is a formal contract that acts much like a standard NDA would , in that it forces the parties involved to define and structure their agreement to the fullest extent of the law, and often times, they’ll do so in either record time, or on a short deadline.
Many funding deals have been known to fall through even before they close. By having an angel investment agreement set in place, your startup will have the ability to make sure that everyone is on board with having an angel in the first place, and that everything involving the angel investment agreement gets structured in a way that keeps your business secure in the long run. Like any regular contract, it binds both parties to collective, as well as individual terms that can be legally enforced later on.
Components of an Angel Investment Agreement
An angel investment agreement is essentially a legal contract between an investor and a startup, covering the various terms of an investment of capital from the investor. Before any money changes hands, both parties should be on the same page regarding the following essentials:
Term sheet
The first step after negotiating the amount and form of investment is to put together a term sheet outlining the proposed deal structure. Both parties review the terms before signing. It’s important to understand that this is not the investment itself, just a set of non-binding terms.
Equity ownership stake
Investors expect some sort of ownership interest in whatever percentage of the business their investment amount represents. Startups should decide on the right amount of giving up before being presented with an ownership amount from the investor. A thorough valuation of your business, outlining assets and liabilities, will help you determine how much you should give up.
Rights of the investor
Terms regarding the rights of the investor upon exit (like the right of first refusal, registration rights and co-sale rights), board seats and advisory board membership should be addressed in the agreement. It should also stipulate the right to participate in future funding rounds.
Exit strategy
Angel investors dump a lot of time, money and energy into a startup. Make sure everyone’s on the same page when it comes to the exit strategy of the business. Generally, angel investors want to stay on board for about five to seven years, until they can cash out on their investment during some sort of sale or acquisition of the company.
Importance of Using an Angel Investment Agreement Template
A useful approach to drafting documents pertaining to Angel investment is to use a template having something similar to the following sections: These are listed in the order that seems to make sense. So if you have a couple of these documenting the same deal, or are chomping at the bit to get started and so have drafted two or three drafts without this type of treatment, just create those sections and string together what you have done so far into the format of one combined agreement. The advantages of using a template are: (1) efficiency (even if you are the smartest guy in the office, it will generally benefit you if there is a degree of repetition in the technical language, and this is what templates provide); (2) clarity (some types of startups may be able to operate adequately for many years with minimal record-keeping, but it is usually of great value to be able to review professional agreements and find exactly what is needed in a short period of time); and (3) legal safety (there is a real danger for entrepreneurs to miss important issues if they do not use professional templates, and it is possible to be the subject of litigation years after a company has been formed, and in such circumstances a relatively technical argument to the effect that an important issue was overlooked in relation to a small capital contribution can destroy a lifetime of work in the form of a trial court judgment).
How to Personalize Your Angel Investment Agreement Template
A customizable angel investment agreement template can be adapted to the specific needs of the business receiving the funds and the requirements of the investor. Because each startup is unique, the most important step is to use a basic template. This template should include all relevant business information, terms and conditions. Once the basic version is created and agreed upon, revisions can be made as needed to agree with individual investor requirements.
Commonly included clauses in a basic angel investment agreement template include information about the type of security offered: common stock, convertible preferred stock or debt (with or without conversion to equity). The amount of the investment, the investment schedule and how interest on a debt will be paid should be outlined in the agreement. Other important areas to adjust include information about the vesting period for stock, buy-back guarantees for shares or provisions for the company to force shareholders to sell back to the company for an existing valuation (also known as "drag along rights"). Additional provisions to include would be any special rights the investor might have to purchase more shares of the company (known as a "pro-rata" right), whether they get to hire and fire the CFO/C-suite and other related information.
Other issues to address include whether there are any special requirements, such as board members or management to be appointed by the investor, or requirements to meet a specific valuation multiple before receiving the funds.
An angel investment agreement is, essentially, a contract between a startup and an angel investment which sets the terms for the release of the funds. Therefore, like any contract, both parties should include sufficient information that the expectations of the contract will still be met if an investor does not perform in accordance with the expectations of the contract. Many of these issues can be addressed by explaining how the default will be handled, whether it is by legally enforcing the contract or by some other method.
Like any other business contract, an angel investment agreement template should also include a clause addressing the potential for dispute. Not every business relationship will be smooth and amicable. Having a clear statement about how disputes will be handled is essential.
Pitfalls to Avoid
When it comes to the cornerstone of your new business, having a partnership agreement in place from the very start is essential. So, even though templated or generic documents are often used in the early stages to save time and money, there are still some common mistakes that you’ll want to avoid.
First, forgoing independent legal counsel can be a big mistake. You likely have a huge passion project that you want to get off the ground. It’s easy to make a deal and then regret it later when you have more information. You’ll need a key partner and to protect your interests, make sure an attorney representing you reviews that angel investment agreement template.
Second, avoid skimping on important issues like insurance and licensure . As previously mentioned, independent counsel can help you make sure you have everything in order before signing.
Another misstep is relying solely on templates without discussing terms. A template can be a really great place to start but using it as a generic standard can be costly in the long run. Determining the details of a partnership should be done by openly discussing the terms and conditions that best benefit your unique startup.
Finally, don’t forget to address termination or withdrawal. It’s fun to dream about the next step of your startup journey. However, for every relationship, there is a next step and unforeseen circumstances may happen that bring partners apart. Including details and outlining exit strategies for a smooth transition can prevent big issues and even court battles later down the road.
Legal Aspects of Angel Investment Agreements
When drafting or reviewing an angel investment agreement, it’s not just the equity and other terms that are important. Legal considerations must also be thoroughly covered. These include the need to comply with the relevant laws, such as the Companies Act (Act), the Companies Act Regulations (Regulations) and ASIC rules.
The terms set out in an angel investment agreement are required to comply with the Act and the Regulations. If shares are issued that do not fall into one of the relevant disclosure exemptions, then the company must issue a prospectus or product disclosure statement (PDS). PDSs are typically not suitable for private companies as there are certain timeframes in which to make an offer under the PDS. An offer under a PDS cannot be revoked, unlike an offer under a prospectus. ASIC does not require companies to provide a PDS for offers of securities made to sophisticated and professional investors. Companies that are not disclosing entities and are not listed, issued to sophisticated and professional investors do not need to issue a prospectus, a PDS or include a disclosure statement. An investment agreement with a term of more than five years is a "consumer contract" within the meaning of section 26 of the Australian Consumer Law (ACL). If the angel is a consumer under the ACL (i.e. an individual, company or small business) then this imposes additional requirements. These include that the advisor cannot rely on any terms and conditions that unfair or have the effect of excluding any duty or liability arising under the ACL (see below). All contracts entered for the purpose of a business must be translated from English into any other language that a party is likely to have service in. If the contract is inconsistent, the English version will prevail. An offer of securities can be "misleading or deceptive", or likely to mislead or deceive. If the investor does not read the entire investment agreement, it could amount to a breach of contract for misleading or deceptive conduct where the investor might have relied on something contrary to the requirements of the contract in deciding whether to enter the contract. English law will only apply if so stated in the investment agreement. An angel investor will often be required to insert a "cooling-off clause" into the contract, to be able to exercise an option to rescind within a specified period on signing. Taxable income will often be reduced by any expenses incurred in connection with a company, and the value of the interest (i.e. the shares) will drop significantly following investment.
Sources for Trusted Angel Investment Agreement Templates
Investors or founders seeking to find a reliable angel investment agreement template have many options. Both free and commercially available templates can be used for early-stage angel investments. Sources of free templates include the U.S. Department of Commerce, SCORE, and larger legal platforms such as LexisNexis, Legalzoom and Rocketlawyer, although these may require an account. For example, the U.S. Department of Commerce has a model angel investment agreement with a 5 percent interest rate written by Starting Your Business, a publication that assists entrepreneurs with the nuts and bolts of getting started . Another resource is a 2018 Model Angel Investment Term Sheet with Comments put out by the U.S. Small Business Administration.
Paid templates can also be found on larger legal platforms and through other service providers or packaged programs created by large legal firms. An example is a paid service offered by Lawyers Incorporated, who offer a comprehensive package with an angel investment term sheet, investor questionnaire, subscription agreement and other documents to guide clients through the investment process. Other paid products are available on the Lexis, Legalzoom and Rocketlawyer platforms that require signing up and paying a fee.