Types of investment contracts: A comprehensive overview for startups and investors

Investment agreements form the foundation of any successful financing and are far more than just legal documents. They define the rules of the game for cooperation between start-ups and investors, set out rights and obligations and create a basis of trust that is essential for long-term partnerships. This is not just about capital flows, but also about strategic considerations: What goals are the parties pursuing? How is the risk distributed? And how can a balance be struck between control and flexibility?

It is crucial for start-ups to understand the different types of contracts in order to choose the right form of financing. Different phases of a company – from founding to scaling to expansion – require customized solutions. Investors, in turn, need to ensure that their interests are protected without hindering the company’s growth potential. This requires a deep understanding of the legal and economic framework as well as the strategic goals of both sides.

A well-drafted investment agreement offers more than just legal security. It provides clarity on key issues such as participation rights, exit strategies or profit distribution and minimizes potential conflicts. In addition, such an agreement can serve as a strategic instrument to optimize cooperation and achieve common goals efficiently.

This article presents the most important types of investment contracts – supplemented by detailed practical examples and entrepreneurial perspectives. The aim is not only to shed light on legal aspects, but also to make the strategic considerations behind the contracts understandable. Whether venture capital financing, angel investment or crowdfunding: each type of contract has its own special features and challenges. This overview is intended to help start-ups and investors make informed decisions and lay the foundations for a successful partnership.

Venture capital contracts: For larger financing rounds

Venture capital contracts (VC contracts) are at the heart of many growth financing arrangements. They are primarily used for start-ups in the scaling phase, when large sums of money are needed to gain market share or develop new products. These contracts are often complex and contain detailed provisions such as

– Liquidation preferences: Who receives money first in the event of an exit (e.g. sale of the company), and how much?
– Anti-dilution clauses: protective mechanisms to secure the investors’ share in subsequent financing rounds.
– Co-determination rights: influence on strategic decisions, for example through seats on the advisory board or management board.

Practical example: A SaaS start-up on course for growth

A SaaS start-up in the field of artificial intelligence is about to receive its Series A financing. The venture capitalist is offering 5 million euros in exchange for 25% of the company’s shares. The proposed deal includes a 2x liquidation preference – meaning that in the event of an exit, the VC will receive double their investment back before the founders or other investors see any money.

The founders are initially skeptical as they fear losing control of their company in the long term. After intensive negotiations, a graduated liquidation preference is agreed: In the event of an exit, the VC first receives its investment back, after which profits are distributed on a pro rata basis. It is also agreed that the VC will have a seat on the advisory board, but that strategic decisions can only be made with the founders’ consent.

Result: The contract creates a balance between the interests of the investor and the founders. The startup can grow without losing its autonomy, while the VC is sufficiently protected.

2. angel investor contracts: Early-stage financing with a personal touch

Angel investors are often experienced entrepreneurs or wealthy individuals who provide capital in the early stages of a start-up. In addition to financial resources, they often contribute valuable industry knowledge and networks. Their contracts are less formal than VC contracts, but still contain important provisions such as:

– Investment amount: What percentage of the company does the investor receive?
– Repayment terms: What happens if the startup fails?
– Co-determination rights: Should the angel investor be actively involved in decisions?

Practical example: A foodtech startup finds a mentor

A foodtech startup is developing an innovative app for sustainable meal planning and needs €100,000 to enter the market. An angel investor from the food industry shows interest and offers not only capital but also access to his network of wholesalers.

The contract stipulates that the angel investor receives 15% of the shares in the company and acts as an advisor. In order to avoid potential conflicts, it is stipulated that operational decisions lie solely with the founding team. At the same time, the start-up undertakes to keep the investor regularly informed of important developments.

Result: The angel investor not only contributes capital, but also becomes a valuable mentor to the start-up. The clear allocation of roles in the contract ensures that both sides can work together harmoniously.

3. convertible notes: Flexibility for uncertain valuations

Convertible notes are a flexible form of financing between loans and equity. They are particularly suitable for situations in which a precise valuation of the company is difficult – for example in the seed phase or for innovative business models.

– Conversion into shares: The loan is converted into shares in a future financing round.
– Interest: The investor receives interest until the conversion.
– Cap and discount: Maximum valuation (cap) and discount (discount) on conversion.

Practical example: A PropTech startup relies on flexibility
A PropTech startup is developing a platform for digital real estate valuation and needs capital in the short term to further develop its prototype. As a precise valuation of the company is not yet possible, the founding team opts for a convertible note.

The contract stipulates:
– A cap of EUR 3 million (maximum valuation on conversion).
– A discount of 20% (discount on the share price on conversion).
– An interest rate of 5% per year.

After eight months, the start-up completes Series A financing – the convertible note is automatically converted into shares.

Result: The start-up gains time to develop its product and can later make a well-founded evaluation. The investor benefits from an attractive discount on his shares.

4. crowdfunding contracts: Many investors, clear structures

Crowdfunding has established itself as an alternative form of financing – especially for creative projects or technology-oriented start-ups. Here, many small investors invest in a company via platforms such as Seedmatch or Companisto.

– Profit sharing: How is income distributed?
– Exit options: Conditions for the sale of units.
– Transparency obligations: Regular reporting to investors.

Practical example: A GreenTech project inspires the crowd
A GreenTech start-up develops an innovative solar technology and launches a crowdfunding campaign on a well-known platform. Within three months, it raises 750,000 euros from over 1,000 small investors.

The standardized contract provides for:
– A profit share of 5% per year.
– A repayment option after five years.
– Regular updates on the progress of the project.

The startup also decides to make individual adjustments to the contract: an exit clause is inserted that stipulates that small investors receive a fixed percentage when the company is sold.

Result: Crowdfunding enables the startup to raise capital and at the same time build up a broad supporter base – including an important marketing effect.

Why customized contracts are crucial

The above examples show impressively how differently investment contracts can be structured – depending on the company’s objectives and the expectations of the investors. A well-drafted contract not only creates legal certainty, but also trust between the parties.

As a lawyer with entrepreneurial experience, I support you in developing individual solutions that take all interests into account – whether by drafting new contracts or optimizing existing agreements. I attach particular importance to this:

1. to prepare complex legal requirements in an understandable way.
2. to translate business objectives into legal structures.
3. to recognize potential conflicts at an early stage and secure them contractually.

If you are facing an important financing round or need support with an investment agreement – be it in negotiations with VCs or in setting up a crowdfunding project – I will be happy to assist you!

Author: Marian Härtel

Marian Härtel ist Rechtsanwalt und Fachanwalt für IT-Recht mit einer über 25-jährigen Erfahrung als Unternehmer und Berater in den Bereichen Games, E-Sport, Blockchain, SaaS und Künstliche Intelligenz. Seine Beratungsschwerpunkte umfassen neben dem IT-Recht insbesondere das Urheberrecht, Medienrecht sowie Wettbewerbsrecht. Er betreut schwerpunktmäßig Start-ups, Agenturen und Influencer, die er in strategischen Fragen, komplexen Vertragsangelegenheiten sowie bei Investitionsprojekten begleitet. Dabei zeichnet sich seine Beratung durch einen interdisziplinären Ansatz aus, der juristische Expertise und langjährige unternehmerische Erfahrung miteinander verbindet. Ziel seiner Tätigkeit ist stets, Mandanten praxisorientierte Lösungen anzubieten und rechtlich fundierte Unterstützung bei der Umsetzung innovativer Geschäftsmodelle zu gewährleisten.