Equity agreements determine how ownership is divided among investing partners when a new business is started. The number of partners can vary and the dividing of profits, stock, responsibility and payoffs are outlined clearly within an equity agreement as investments and direct participation within the company may vary for each partner. Equity agreements are legally binding documents and can be drawn up by an attorney. Standard agreements can also be found online.
Determining What Type of Equity Agreement You Need
Equity agreements range from the very simple to the extremely complex. Complex agreements may identify multiple partners, intricate conditions surrounding the repayment of the investment or distribution of the profits and whether or not employees are considered investors. These agreements require an attorney. If your agreement is simple with only a few terms, you may be able to find a suitable template online.
Components of a Simple Equity Agreement
When only a few partners are involved, a simple equity agreement can be drawn up, but it is still important that it be reviewed by an attorney. The main components of a simple equity agreement include the name of the company, names of investors, duration of the contract, amounts of money invested, what the funds are being used for and what the investors are getting in return for their investments. This document should be signed by all parties and notarized.
Overview of Complex Equity Agreement
Equity agreements are more complicated when stock options, limited partnerships and varying responsibilities come into play. Add the possibility of employee investment and it becomes clear that the agreement must be written to accommodate many scenarios, leaving no room for misinterpretation. Other issues such as vested shares, fees and expenses, the severing of ties with an investor or the elimination of a partner make it essential to seek legal counsel when drawing up this type of equity agreement.
The Question of Necessity
Even the best of friends can quickly disagree on who gets what and who does which tasks within a partnership. Regardless of how comfortable you are with your partner or investors, make sure your interests are protected. Asking for a partnership agreement is not an indication that you do not trust your partners. It specifies each person's role and responsibilities within the company and details their rewards.
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