Investment Decisions
Last Updated:
December 21, 2020

Angel Investor Agreements: Terms Every Angel Investor Should Know

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Angel Investor Agreements: Terms Every Angel Investor Should Know

When you, an Angel Investor, invests money in a company, you don't just say, “here is a suitcase of cash, have fun with it.” 

The agreement comes with a set of terms that define the relationship between the investor and the company - as it should. You are investing in the company with the ultimate goal to make a good return on your investment.

Therefore, you need to know how you’ll invest, what the investment will do, and how you’ll get your money back.

The challenge...

Terms that govern the relationship between the investor and the company can be substantial. The many pages can be overwhelming.

And if you sign an agreement without reading them, you won’t know what happens. So it’s essential to understand what is governing the relationship. It is not uncommon for those involved to fall into surprises on either side during an exit, especially when the company sells for a high price.

So, the article discusses various terms, what they mean, and why you put them in there.

Let’s have a look.

1. Angel Investor agreements

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The importance of Angel Investor agreement

Angel Investor agreements are all about creating a win-win situation. Determining their provisions is a critical step in every deal structure. The most common Angel Investor agreements are either 1) a SAFE, 2) a convertible note or 3) Share Sale Agreement (commonly known as a priced round).

It’s a written agreement between investor and company when engaging in an investment deal. It highlights and represents the interest of all parties involved.

The contract protects both the company and the investor from any misunderstandings.

An investor agreement is legally binding and outlines information about the investment deal. It stipulates the present terms of sales, roles, and responsibilities of both parties.

Angel Investor agreement describes the parameters of the investment. It has specific clauses that protect both the entrepreneur and the investor.

However, the document should be well-written and show accurate information.

Writing an investor agreement can take various formats. You should take care to understand the terms of the deal. It is rare that Angel Investors have the opportunity to negotiate the terms of the deal. It is most likely to happen at the pre-seed stage, and perhaps at the seed stage if the Angel Investor is coming in with a very large check. sample Angel Investor agreements.

2. Seed-stage Angel investments

Seed-stage Angel investments come in three primary forms.

  1. Equity stake
  2. Convertible note

In either case, the agreement states how much an investor will get for their investment. The difference between the two is when you decide on how much equity you will receive.

a) Equity stake

An equity stake is a percentage of company stocks you hold. You build your equity through the purchase of shares. Smaller companies may create such a stake in a simple investor agreement.

The amount of equity you receive depends on the valuation that you agree upon with the entrepreneur and the amount you are looking to invest. So if you valued the company at $1M and put in $150K of cash, you would get 15% of the company.

b) Convertible note

Sometimes the Angel Investor and the entrepreneur may not agree on exactly what value the company has today.

In such a case, they opt to issue a convertible note that lets both parties set the company value at a later date. This later date is usually during the next round of financing, and you lock in the valuation of the company at that point.

In this situation, the investor effectively loans money to a startup, and instead of a return in the form of principal plus interest, the investor will receive a future return via equity in the company.

So if you put in $150K as a convertible note, it would mature at a specific date in the future - say a year from now.

It will likely accrue interest during the time, and on the maturity date, you can choose to ask back your money in cash or reinvest the money into the company as equity based on the valuation at that time.

Convertible notes have become popular with Angel Investors and entrepreneurs because they align both parties to maximize the investment.

Let’s say a year from now, the company performs extraordinarily well and raises a professional round of venture capital at a high valuation. The money invested a year prior now turns into a substantial equity stake.

On the other hand, if the company stalls, its valuation could be much lower than what you would get when you made the deal. This isn’t a great outcome for both parties, because it means the company’s value has decreased.

3. Term sheets

Meeting table with laptop, papers and tumbler
A binding investor financing agreement is drawn up upon agreeing in the term sheet.

Once you agree on the amount and the investment structure, you’ll receive a term sheet. A term sheet is an investor agreement form that is non-binding and outlines the key terms of the investment.

Once both parties agree on the details laid out in the term sheet, a binding investor financing agreement or contract is drawn up.

4. Angel Investor non-disclosure agreement

Non-disclosure agreements are an essential legal framework used to bar recipients of sensitive and confidential information from sharing it with the public. They are quite uncommon in the angel investing ecosystem, although some companies who are in stealth may ask for them. 

Companies and startups use such documents to ensure those with whom they are negotiating don't share sensitive information or intellectual property.

5. Angel Investor loan agreement

An investor loan agreement is a binding contract between two or more parties to validate the loan process. An Angel Investor loan agreement lays out how long the borrower has to pay back the money, and at what interest or return on investment (ROI).

Investor loan agreements are legally binding documents, and you can sue the borrower to secure your investment in case of breach of contract.

6. Investor rights agreement

An investor rights agreement (IRA) is a document negotiated between an investor and other stakeholders providing capital to a company.

An IRA provides the rights and privileges afforded to the two stakeholders in the company.

An investor rights agreement is not a legal requirement, but it is legally binding. It’s also strongly advisable to have it in place to protect the investor from any potential conflicts.

Features of an investor rights agreement

The most common rights the company gives to the investor are;

  • Participation rights
  • Rights to receive corporate reports
  • Stock liquidity
  • Board membership
  • Dividend rights and calculations
  • Indemnification and expenses
  • Observer rights
  • Inspection rights
  • Provisions to address unique concerns

What should an Angel Investor agreement include?

Securing a good investment opportunity is a critical component to making a return on your investment and growing businesses.

But to maintain and protect the critical relationship with founders, an investor agreement should be carefully drafted and include key terms.

The Angel Investor agreement can bring peace of mind to both the investor and founder that their interests have been preserved.