Template: Angel Investor Agreement with Royalties

Angel investing is a crucial stage in the funding cycle of startups. Angels, typically high-net-worth individuals, provide capital to early-stage companies in exchange for equity ownership or convertible debt. One of the most important steps in the process is drafting a clear, equitable, and enforceable angel investor agreement. This document sets the terms of the investment, establishes the rights and responsibilities of each party, and helps to prevent disputes. In this post, we’ll walk through the key components of an angel investor agreement and offer a free template you can use as a starting point.

What Is an Angel Investor Agreement?

An angel investor agreement, also known as an investment agreement, is a legally binding document that outlines the terms and conditions of the investment. This includes the amount of the investment, the equity stake the investor will receive, and the ways the investment may be used. The agreement also covers vital matters like anti-dilution provisions, royalty payments, representations and warranties, confidentiality, and more.

Key Components of an Angel Investor Agreement

Investment and Shares

This section details the amount of money the investor will put into the company and the equity stake they will receive in return. It also stipulates how the investment will be used, usually for operations, expansion, and growth-related activities.

Anti-Dilution Provisions

If the company issues additional shares at a lower price in the future, anti-dilution provisions protect the investor’s percentage of ownership in the company.

Royalty Payments

Some angel investor agreements include a provision for royalty payments. This means the company agrees to pay the investor a percentage of its revenues in addition to the equity stake.

Representations and Warranties

This section includes statements by the company about its current legal and financial status, ensuring that the company is in good standing, that the shares are free of encumbrances, and that the company is not currently involved in any litigation.

Investment Representation

The investor also makes representations and warranties, particularly about their status as a sophisticated investor and their intent to comply with securities laws.

Rights as a Stockholder

This section outlines the rights of the investor as a stockholder, such as voting rights and the right to receive dividends.

Tag-Along Rights

Tag-along rights protect minority shareholders. If the majority shareholders sell their stake, these rights allow the minority shareholders to join the transaction and sell their shares at the same terms and conditions.

Auditing Rights

This gives the investor the right to verify the accuracy of royalty payments through an independent auditor.

Confidentiality

Both parties agree to keep all non-public, confidential, or proprietary information confidential.

Indemnification

Both parties agree to compensate the other for any losses, liabilities, damages, and expenses arising from a breach of the agreement.

Non-Disparagement

Both parties agree not to make any negative comments or statements about the other.

Miscellaneous

This section includes various legal clauses like the process for giving notices, the entire agreement clause, and the waiver clause.

Free Angel Investor Agreement Template

Please note that while this template covers the fundamental aspects of an angel investor agreement, each deal is unique. It is strongly recommended that you seek legal counsel to ensure the agreement is tailored to your specific situation and is legally sound.

INVESTMENT AGREEMENT
THIS INVESTMENT AGREEMENT (the “Agreement”) is entered into as of _____, 2023 (the “Effective Date”), by and between (Company Name), of (address) (the “Company”) and (Investor’s Name), of (address) (the “Investor”).
For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows:

Investment & Shares.
a. Scope. The Investor agrees to invest $_____ in the Company _ shares of Company common stock (the “Shares”) representing% of the total equity in the Company. This investment shall be used for the operations, expansion, and other growth-related activities of the Company as disclosed to the Investor.
b. Anti-Dilution. In the event the Company issues additional shares in the future at a purchase price less than the current purchase price (the “New Issue”), the Company shall issue to the Investor, at no additional cost, that number of additional shares as shall be necessary to ensure that the percentage ownership of the Investor in the Company immediately following such New Issue is the same as the percentage ownership of the Investor in the Company immediately prior to such New Issue.
Royalty Payments.
a. Amount. In addition to the Shares, the Company agrees to pay to the Investor, on a quarterly basis within thirty (30) days of the close of each fiscal quarter, a royalty of % of gross revenues of every sale made by the Company. b. Duration. The royalty payments are to continue until whichever of the following two conditions occurs first: i. The cumulative total of royalty payments made to the Investor reaches $, or
ii. The third anniversary of this Agreement from the Effective Date.
Representations and Warranties of Company. Company hereby warrants and represents:
a. Organization and Standing. Company is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation and has the corporate power and authority to carry on its business as it is now being conducted.
b. Restrictions on Shares.
i. The Company is not a party to any agreement, written or oral, creating rights in respect to the Corporation’s Shares in any third person or relating to the voting of the Corporation’s Shares.
ii. Company is the lawful owner of the Shares, free and clear of all security interests, liens, encumbrances, equities and other charges.
iii. There are no existing warrants, options, stock purchase agreements, redemption agreements, restrictions of any nature, calls or rights to subscribe of any character relating to the stock, nor are there any securities convertible into such stock.
c. Capitalization. The Shares of the Company have been duly authorized and validly issued. None of the outstanding shares of capital stock of the Company were issued in violation of the preemptive or other similar rights of any securityholder of the Company.
d. No Pending Litigation. There is no action, suit, proceeding or investigation pending or threatened against the Company which, either in any one instance or in the aggregate, may result in any material adverse change in the business, operations, financial condition, properties or assets of the Company, or in any material impairment of the right or ability of the Company to carry on its business substantially as now conducted, or in any material liability on the part of the Company, or which would draw into question the validity of this Agreement or of any action taken or to be taken in connection with the obligations of the Company contemplated herein.
e. Organizational Documents. The Company has furnished to the Investor true, correct and complete copies of the Company’s Certificate of Incorporation and other organizational documents requested by the Investor.
f. Financial Statements. The financial statements provided to the Investor, if any, have been prepared in conformity with generally accepted accounting principles (“GAAP”). The financial data is accurate.
g. Material Liabilities. The Company has no liability or obligation, absolute or contingent (individually or in the aggregate), except obligations and liabilities incurred after the date of incorporation in the ordinary course of business.
h. Compliance with Other Agreements. The execution of this Agreement will not conflict with, result in the breach of any provision of or the termination of, or constitute a default under, any agreement to which the Company is a party or by which the Company is or may be bound.
j. Employment Matters. The Company: (i) is in compliance in all respects with all applicable federal, state and local laws, rules and regulations with respect to employees, if any; (ii) is not liable for any arrears of wages or any taxes or any penalty for failure to comply with any of the foregoing; and (ii) is not liable for any payment to any trust or other fund governed by or maintained by or on behalf of any governmental authority, with respect to unemployment compensation benefits, social security or other benefits or obligations for employees.
k. Tax Matters. The Company has timely prepared and filed all tax returns required to have been filed with all appropriate governmental agencies and timely paid all taxes. There are no material unpaid assessments against the Company. There are no tax liens or claims pending or, to the Company’s knowledge, threatened against the Company.
Investment Representation. The Investor represents, warrants and acknowledges that the Investor: (i) has had an opportunity to ask questions of and receive answers from a Company representative concerning the terms and conditions of this investment; (ii) is acquiring the Shares with the Investor’s own funds, for the Investor’s own account for the purpose of investment, and not with a view to any resale or other distribution thereof in violation of the Securities Act of 1933, as amended (the “Securities Act”); (iii) is a sophisticated investor with such knowledge and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the Shares and that the Investor is able to and must bear the economic risk of the investment in the Shares for an indefinite period of time because the Shares have not been registered under the Securities Act, and therefore, cannot be offered or sold unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Furthermore, the Company may place legends on any stock certificate representing the Shares with the securities laws and contractual restrictions thereon and issue related stop transfer instructions. The Investor acknowledges and understands that the Shares have not been registered under the Securities Act, nor registered pursuant to the provisions of the securities laws or other laws of any other applicable jurisdictions, in reliance on exemptions for private offerings contained in Section 4(2) of the Securities Act and in the laws of such jurisdictions. The Investor further understands that the Company has no intention and is under no obligation to register the Shares under the Securities Act or to comply with the requirements for any exemption that might otherwise be available, or to supply the Investor with any information necessary to enable the Investor to make routine sales of the Shares under Rule 144 or any other rule of the Securities and Exchange Commission.
Legends. Any share certificate evidencing the Shares issued hereunder shall be endorsed with the following legend (in addition to any legend required under applicable federal or state securities laws or corporate laws or any other contract between the Investor and the Company): THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS CONTAINED IN A RESTRICTED STOCK PURCHASE AGREEMENT, AS IT MAY BE AMENDED FROM TIME TO TIME, BETWEEN THE COMPANY AND THE STOCKHOLDER. A COPY OF THIS AGREEMENT IS ON FILE WITH THE SECRETARY OF THE COMPANY.
Rights as a Stockholder. The Investor shall have the rights of a stockholder with respect to the voting of the Shares and dividends. The Investor shall be considered the record owner of and shall be entitled to vote the Shares to the extent such Shares are entitled to voting rights. The Investor shall be entitled to receive all dividends and any other distributions declared on the Shares; provided, however, that the Company is under no duty to declare any such dividends or to make any such distribution.
Tag-Along Rights. In the event that the Company proposes to sell more than twenty-five percent (25%) of its shares (the “Sale Shares”) to a third party (the “Buyer”), the Company shall give the Investor written notice of its intention, describing the Sale Shares, the price, and the terms and conditions upon which the Company proposes to sell the Sale Shares. The Investor shall have the right, exercisable by written notice to the Company within fifteen (15) days after receipt of the Company’s notice, to require the Company to include the Investor’s shares in the proposed sale on the same terms and conditions.
Auditing Rights. The Investor shall have the right, at its own expense, to have an independent auditor inspect the Company’s books and records to verify the accuracy of royalty payments. If such audit reveals that the Company has underpaid royalties to the Investor by more than five percent (5%) for any period, then the Company shall pay the cost of such audit and shall promptly pay to the Investor the amount of such underpayment.
Mutual Confidentiality.
a. Scope. Each party (the “Receiving Party”) agrees to keep confidential all non-public, confidential or proprietary information, including, but not limited to, trade secrets, technology, information pertaining to business operations and strategies, and customer information, that it obtains from the other party (the “Disclosing Party”), whether written or oral, relating to the Disclosing Party’s business and operations (the “Confidential Information”). The Receiving Party agrees to use the Disclosing Party’s Confidential Information solely for the purposes of carrying out its obligations under this Agreement and not for any other purpose. The Receiving Party shall not disclose such Confidential Information to any third parties without the prior written consent of the Disclosing Party, except to its employees, agents, or consultants (“Representatives”) who need to know such Confidential Information for the purposes of performing the Receiving Party’s obligations under this Agreement and who are informed of the confidential nature of the Confidential Information and are bound by confidentiality obligations no less protective than those in this Agreement.
b. Duration. This confidentiality obligation shall survive the termination of this Agreement and shall remain in effect for a period of five (5) years from the date of the termination of this Agreement.
c. Exclusions. Notwithstanding the foregoing, the obligations of confidentiality shall not apply to any information that: (i) is or becomes generally available to the public other than as a result of a disclosure by the Receiving Party or its Representatives; (ii) was known to the Receiving Party on a non-confidential basis prior to its disclosure by the Disclosing Party; (iii) is or becomes available to the Receiving Party on a non-confidential basis from a source other than the Disclosing Party, provided that such source is not known by the Receiving Party to be bound by a confidentiality agreement with the Disclosing Party or otherwise prohibited from transmitting the information by a contractual, legal, fiduciary, or other obligation; or (iv) is independently developed by the Receiving Party without reference to or use of the Confidential Information.
Mutual Indemnification. Both parties agree to indemnify the other, its officers, directors, agents, and representatives from and against all losses, liabilities, damages, and expenses (including reasonable attorney fees and costs) arising out of or in connection with any breach of any representation, warranty, covenant, or agreement made by them in this Agreement.
Mutual Non-Disparagement. Each party agrees not to make, express, transmit, speak, write, verbalize or otherwise communicate in any way (or cause, further, assist, solicit, encourage, support or participate in any of the foregoing), any remark, comment, message, information, declaration, communication or other statement of any kind, whether verbal, in writing, electronically transferred or otherwise, that might reasonably be construed to be derogatory or critical of, or negative toward, the other party or any of its services, products, or practices, or any of its directors, officers, Affiliates, subsidiaries, employees, agents or representatives. This non-disparagement provision shall not, in any way, restrict or impede the party from exercising protected rights to the extent that such rights cannot be waived by agreement or from complying with any applicable law or regulation or a valid order of a court of competent jurisdiction or an authorized government agency. The party acknowledges and agrees that this non-disparagement provision is a material term of this Agreement, the absence of which would have resulted in the other party refusing to enter into this Agreement, and that any breach of this non-disparagement provision will cause the other party irreparable harm, entitling the other party to injunctive relief without the necessity of proving actual damages, in addition to any other relief that may be available. The obligations under this section shall survive the termination or expiration of this Agreement.
Miscellaneous.
a. Notices. All notices to be given or otherwise made to any party to this Agreement shall be deemed to be sufficient if contained in a written instrument, delivered by hand in person, or by express overnight courier service, or by electronic facsimile transmission (with a copy sent by first class mail, postage prepaid), or by registered or certified mail, return receipt requested, postage prepaid, addressed, if to the Investor, to the address set forth below or at the address shown on the records of the Company, and if to the Company, to the Company’s principal executive offices, attention of the President.
b. Entire Agreement; Modification. This Agreement constitutes the entire agreement between the parties relative to the subject matter hereof, and supersedes all proposals, written or oral, and all other communications between the parties relating to the subject matter of this Agreement. This Agreement may be modified, amended or rescinded only by a written agreement executed by both parties.
c. Waivers. No waiver of any breach or default hereunder shall be considered valid unless in writing, and no such waiver shall be deemed a waiver of any subsequent breach or default of the same or similar nature.
d. Equitable Relief. The parties hereto agree and declare that legal remedies are inadequate to enforce the provisions of this Agreement and that equitable relief, including specific performance and injunctive relief, may be used to enforce the provisions of this Agreement.
e. Severability. The invalidity, illegality or unenforceability of any provision of this Agreement shall in no way affect the validity, legality or enforceability of any other provision.
f. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, subject to the limitations set forth herein.
g. Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of __.
h. Counterparts. This Agreement may be executed in two or more counterparts, each one of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date.

X: _____________
(Name, Title)
Date: ___________