If you have a company that needs investment, you have a lot of options for the type of investment to create. Depending on the situation, you may also want to consider loans or other ways to finance your company beyond investments.
Investment Agreements are transactions that give a person or business an ownership interest. Either now or in the future, in your company in exchange for anything of value.
The most common types of Investment Agreements, in no particular order, are these:
The Stock Purchase Agreement is the simplest types of Investment Agreements. This is generally an exchange of money for stock. Much like you would do when purchasing stock from the stock market. But because the company is no publicly traded, there is a lot more paperwork.
Non-statutory Stock Option Agreements. Sometimes called Non-qualified Stock Option Agreements. These are the default if you want to give stock options to an investor or worker in your company. A stock option is the ability to buy stock later at a price set at the beginning. The idea is that as the value of the company rises, the more profit you can get when you exercise your stock options. Most stock options have restrictions that make them become exercisable over time. This is vesting. On-statutory Stock Options have a less beneficial tax treatment than Statutory Stock Options. But there are also no formal requirements to be able to issue Non-statutory Stock Options.
Statutory Stock Options also called Incentive Stock Options. These are a special type of stock options regulated under the Internal Revenue Code. This type of stock option plan comes with very beneficial tax treatment. But comes with strict requirements that yield higher upfront cost for the company. The most notable restrictions are that these can only grant to employees of the company. And also that the exercise price cannot be lower than the market value per share. They also have restrictions on when they exercise and when they cannot be sold.
Convertible Debt is an interesting instrument. This is where an investor loans money to a company and can later either be repaid. Or else convert the debt into an ownership interest in the company. Among investment agreements, this one is the most creative of how the investor receives a return on investment.
The Restricted Stock Agreement is generally going to actually be one of the earlier examples. But some provisions limit the investor’s ability to claim ownership of the equity interest based on the occurrence of some events
Deferred Compensation isn’t a type of investment. That’s because the recipients don’t receive any ownership from the Deferred Compensation. They may entitle to ownership through one of the other types of agreements. Yet, it was worth noting that many times those employees who are first in agree to receive bonuses or larger salaries later for the work they put in now. In their minds, this is an investment in the future of the company. And they will entitle to this future compensation when the company grows.
Royalty, Commission, or Percent of Revenue. Many times, investors don’t want to own the company. They want to own the profits on the company or product of the company. To receive these, there are Royalty Agreements. These are many things like Commission Agreements or Profits Interests. How this work is that an investor gives money in exchange for a certain percentage or dollar amount over a period of time. There are no rules that state the limitation on a number of years or the amount the investor can take. An investor can negotiate 99% of profits if the owner agrees to it.
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