Drafting Equity Agreements

Note: Want to skip the guide and go straight to the free templates? No problem - scroll to the bottom.
Also note: This is not legal advice.

Introduction

From entrepreneurs to venture capitalists, the importance of equity agreements in any business venture cannot be overstated. These legally binding documents provide clarity and structure to a relationship between two or more parties, protecting their interests accordingly. A well-drafted equity agreement that covers all aspects of the partnership can give investors peace of mind that their money is invested safely in a company, while ensuring that the expected returns are outlined and legal obligations are clearly defined. It can also protect the interests of all parties involved by outlining each party’s rights and responsibilities; providing guidance on how the company should be managed; and delineating procedures for dispute resolution.

Creating an effective equity agreement requires time and expertise - which is why so many people turn to Genie AI for help. Our open source legal template library provides millions of datapoints to teach our AI what a market-standard agreement looks like, allowing anyone to draft and customize high quality legal documents without paying a lawyer or having any prior knowledge on legal templates. With step-by-step guidance available below, you can access our library today - free of charge - to ensure your business venture runs as smoothly as possible with every party’s best interests taken into account. Read on for more information on how you can get started today!

Definitions (feel free to skip)

Shareholders: People who own part of a company, either through purchasing shares of the company or being given shares as part of a compensation package.

Common stock: A type of ownership in a company that grants the shareholder voting rights and the ability to receive dividends.

Preferred stock: A type of stock that grants the shareholder voting rights, the ability to receive dividends, and higher priority in the event of the company’s dissolution.

Restricted stock: A type of equity that is subject to certain restrictions and conditions, such as a vesting period, and is usually not transferable until all conditions have been met.

Capital structure: The ratio of debt to equity that affects the company’s creditworthiness and tax liability.

Vesting schedule: A way of ensuring that founders remain with the company for a set period of time in order to receive their full equity award.

Corporate and securities laws: Laws in place to protect both the company and the investors, which vary depending on the jurisdiction in which the company is registered.

Articles of incorporation: A document outlining the company’s purpose and how it will be managed.

Shareholders’ agreement: A document outlining the rights and responsibilities of the shareholders.

Contents

• Understanding the basics of equity agreements
• Common stock
• Preferred stock
• Restricted stock
• Determining the company’s capital structure and issuing equity to the founders and investors
• Developing a comprehensive understanding of the corporate and securities laws applicable to the equity agreement
• Setting up a vesting schedule for founders, if applicable
• Identifying potential investors and negotiating the terms of their investment
• Gathering the necessary documents, such as the company’s articles of incorporation and the shareholders’ agreement
• Drafting the equity agreement, including the specifics of the company’s capital structure, the number of shares to be offered, the rights of the shareholders, and other details
• Reviewing the equity agreement with legal and financial advisors, to ensure that all parties involved in the equity agreement fully understand its terms and consequences
• Executing the equity agreement, including obtaining the necessary signatures and filing the documents with the relevant government entities
• Following up with investors to ensure that all paperwork has been completed and filed correctly

Get started

Understanding the basics of equity agreements

• Understand the different types of equity and what they mean for both you and the company
• Learn about the different types of equity agreements that can be drafted
• Familiarize yourself with the legal and financial aspects of equity agreements
• Research and analyze existing equity agreements to see what works best in various scenarios
• Become familiar with any laws or regulations related to equity agreements
• Talk to a legal or financial expert to ensure you understand all the aspects of equity agreements

When you can check this step off your list:

• You are familiar with the different types of equity and types of equity agreements
• You understand the legal and financial aspects of equity agreements
• You have done research and analysis of existing equity agreements
• You understand any laws or regulations related to equity agreements
• You have consulted a legal or financial expert to ensure you understand all aspects of equity agreements

Common stock

• Draft the terms and conditions of common stock to be issued
• Include the class of common stock, the number of authorized shares, and the par value of each share
• Specify any restrictions on the transfer of common stock
• Outline any voting rights associated with common stock
• When you have finalized the common stock section of the agreement, you can move on to the next step of the guide which is drafting the terms and conditions of preferred stock.

Preferred stock

• Understand the different types of preferred stock and the rights that come with them
• Consider how the company can issue different classes of preferred stock
• Decide on the number of shares of each type of preferred stock to issue
• Allocate the number of shares to each holder of preferred stock
• Draft the terms of the preferred stock in the equity agreement
• Verify the equity agreement to ensure that it is legally valid and complies with state and federal securities laws
• Once all the above steps are completed, the preferred stock section of the equity agreement can be considered finished and you can move on to the next step.

Restricted stock

• Gather information regarding the company’s capital structure and determine how many restricted shares the founders, investors, and other key individuals will receive.
• Consider any vesting or performance-based conditions that must be met before the restricted stock can be issued.
• Draft the restricted stock agreement and ensure it is signed by all parties involved.
• Obtain the necessary signatures and approvals as required by law.

Once the restricted stock agreement is drafted, signed, and approved, this step can be checked off the list and the next step can begin.

Determining the company’s capital structure and issuing equity to the founders and investors

• Establish the class of securities and the terms of the securities (e.g. who can receive them, how long they can be held, voting rights, etc.)
• Choose the type of corporate entity for the company
• Determine the number of authorized shares
• Establish the company’s capital structure (e.g. how much of the company will be owned by the founders, how much by other investors, etc.)
• Decide the type of equity or debt to be issued and to whom
• Issue equity or debt to the founders, investors, or other parties as needed
• Draft and execute the equity agreement

Once you have determined the company’s capital structure and issued equity to the founders and investors, you can move on to the next step in the process.

Developing a comprehensive understanding of the corporate and securities laws applicable to the equity agreement

• Research the relevant corporate and securities laws in the jurisdiction where the company is incorporated
• Consult with a lawyer who is knowledgeable in corporate and securities law
• Make sure to understand the different types of equity, such as common and preferred stock
• Research the different types of equity and corporate structures that are available
• Understand the different legal implications associated with each type of equity
• Make sure to understand the different tax implications associated with each type of equity
• Once you have a good understanding of the different types of equity and the legal and tax implications associated with each, you can move on to the next step.

Setting up a vesting schedule for founders, if applicable

• Research the various vesting schedules that are available and decide which one works best for the founders and the company
• Make sure to consider various factors such as the length of the vesting period, the speed of vesting, and any applicable cliff periods
• Have the founders sign off on the vesting schedule and include it in the equity agreement
• Once all of the necessary paperwork is completed, the vesting schedule setup is complete and ready to go
• You will know you have finished this step when the vesting schedule has been agreed upon and included in the equity agreement

Identifying potential investors and negotiating the terms of their investment

• Research potential investors and financial institutions to identify those that may be a good fit and willing to invest in the company
• Reach out to the potential investors and financial institutions to discuss the company and the investment opportunity
• Negotiate the terms of the potential investors’ or financial institution’s investment, such as the amount, type, and duration of the investment
• Make sure to include any contingencies or requirements that potential investors or financial institutions may have
• Finalize the terms of the investment and have all relevant parties sign off on the agreement
• Once all parties have agreed to the terms of the investment, you can check this off your list and move on to the next step of gathering the necessary documents.

Gathering the necessary documents, such as the company’s articles of incorporation and the shareholders’ agreement

• Obtain a copy of the company’s articles of incorporation from the relevant government agency.
• Gather the shareholders’ agreement.
• Review the documents and ensure they are up-to-date.
• Make any necessary changes to the documents, such as updating the company’s name, address, or other details.

When you can check this off your list: You will know when you can check this off your list when you have obtained a copy of the company’s articles of incorporation, gathered the shareholders’ agreement, and reviewed and made any necessary changes to the documents.

Drafting the equity agreement, including the specifics of the company’s capital structure, the number of shares to be offered, the rights of the shareholders, and other details

• Identify the company’s capital structure and determine the total number of shares that can be issued.
• Define the rights of the shareholders, such as voting rights, rights to dividends, and other specifics.
• Draft the equity agreement, detailing the company’s capital structure, the number of shares to be offered, the rights of the shareholders, and other details.
• Consult legal and financial advisors to ensure that the equity agreement is in line with all applicable laws and regulations.
• When the equity agreement is finalized, it should be signed by all parties involved.
• Once the equity agreement is signed, you can check this step off your list and move on to the next step.

Reviewing the equity agreement with legal and financial advisors, to ensure that all parties involved in the equity agreement fully understand its terms and consequences

• Meet with legal and financial advisors to review the equity agreement
• Ask questions to ensure understanding of the equity agreement and its consequences
• Get clarifications on any unclear terms or conditions
• Ensure that all parties involved in the equity agreement fully understand its terms and consequences
• When all parties understand the agreement, you can check off this step and move on to executing the equity agreement.

Executing the equity agreement, including obtaining the necessary signatures and filing the documents with the relevant government entities

• Obtain all the necessary signatures from all parties involved in the equity agreement
• File the documents with the relevant government entities
• Make sure that all required forms and documents are completed accurately and in compliance with applicable laws and regulations
• Monitor the progress of the filing and make sure that all paperwork is filed in a timely manner
• Once all the paperwork is filed and the relevant government entities have accepted the documents, you can check this step off your list and move on to the next step.

Following up with investors to ensure that all paperwork has been completed and filed correctly

• Contact investors to verify that all paperwork has been completed and filed correctly.
• Get written confirmation from investors that the paperwork is correct and has been filed.
• Follow up with the relevant government entity to ensure that all documents have been received.
• You’ll know that this step is complete when you have received written confirmation from the investors and the government entity that the paperwork is correct and has been filed.

FAQ:

Q: Is there a difference between drafting an equity agreement in the UK and US?

Asked by William on April 2nd, 2022.
A: Yes, there are some differences when it comes to drafting an equity agreement between the UK and US. Generally speaking, US agreements tend to be more detailed and specific, while UK agreements tend to be more general in nature. For example, US agreements generally include provisions related to vesting periods, voting rights, and board composition, while UK agreements may not include such details. It’s important to understand the applicable laws in both jurisdictions before drafting any equity agreement.

Q: How does drafting an equity agreement for a SaaS business differ from a B2B business?

Asked by Emma on June 21st, 2022.
A: The differences in drafting an equity agreement for a SaaS business compared to a B2B business depend on the specifics of each type of business. Generally speaking, SaaS businesses tend to have different revenue streams than B2B businesses and may require different types of provisions or clauses in their equity agreements. For example, SaaS businesses may require different compensation structures for their employees than B2B businesses do. Additionally, SaaS businesses may also require different types of shareholder rights than B2B businesses do.

Q: What are the implications of drafting an equity agreement with regards to EU law?

Asked by Michael on August 15th, 2022.
A: When drafting an equity agreement with regards to EU law, it’s important to understand the implications of such an agreement on the applicable laws in each EU jurisdiction. Depending on the specifics of the agreement and the country in which it will be executed, there may be certain regulations that need to be taken into account when drafting an equity agreement. Additionally, it’s important to understand how EU law might affect the rights and obligations of shareholders and other stakeholders within the agreement.

Q: What are some common mistakes to avoid when drafting an equity agreement?

Asked by Olivia on December 9th, 2022.
A: When drafting an equity agreement, it’s important to take into consideration all of the relevant legal regulations for each jurisdiction in which the agreement will be executed. Additionally, it’s important to ensure that all parties involved have a clear understanding of their rights and obligations under the agreement. Common mistakes that should be avoided when drafting an equity agreement include not providing sufficient detail on voting rights and other shareholder rights; not clearly defining vesting periods; not providing sufficient detail on board composition and decision-making processes; and not accounting for potential changes in laws or regulations that might affect the terms of the agreement.

Q: What are some factors to consider when deciding whether or not an entity needs an equity agreement?

Asked by Noah on May 4th, 2022.
A: When deciding whether or not an entity needs an equity agreement, there are several factors that should be taken into consideration. These include understanding if there is any need for shareholders or other stakeholders to receive compensation (e.g., through dividends); understanding if any parties involved have conflicting interests that need to be addressed through a written document; understanding if there is potential for business growth or expansion; understanding if there is potential for any disputes between parties; and understanding if there is potential for any changes in laws or regulations that could affect the terms of the agreement. Once these factors are taken into consideration, then entities can make an informed decision as to whether they need an equity agreement or not.

Example dispute

Suing a Company Over Equity Agreement Issues

• Plaintiff must prove that the company violated the terms of the equity agreement, either by failing to perform its contractual obligations, or by taking actions which conflict with the equity agreement.
• Plaintiff will need to provide evidence of the breach of contract, such as documents or witness testimony.
• Plaintiff must also provide evidence of damages caused by the breach of contract, such as lost profits or other economic losses.
• Plaintiff may be able to recover damages for breach of contract, such as lost profits or other economic losses.
• The court may also award punitive damages if the breach of contract was especially egregious.
• Plaintiff may also be able to seek an injunction to prevent the company from violating the equity agreement in the future.
• Settlement may be reached through negotiation between the parties, or through mediation or arbitration.

Templates available (free to use)

Deed Of Adherence For Non Leveraged Investment Agreement
Feature Film Investment Agreement
Investment Agreement Non Leveraged
Real Estate Investment Agreement
Strategic Investment Agreement
Technology Investment Agreement

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