Understanding contractual agreements is never simple. So, let's break it down. As an entrepreneur, having a handle on these agreements is like having a GPS for your business. An essential tool might just be a Contribution Agreement, especially when dealing with cash or assets.
In the simplest terms, a Contribution Agreement is a legal document that manages the transfer of assets (cash, property, etc.) from one party to another, particularly in the business sphere. This contract is usually employed when businesses or individuals make a contribution to a project, partnership, or company in return for equity or shares.
The agreement can also be used for other types of contributions, such as services or time spent on a project. When should you use this agreement? If you’re planning to contribute cash or assets (property, equipment, etc.) to a project in return for equity or shares, then it’s highly recommended that you employ the help of an attorney and draft up a Contribution Agreement.
Every business transaction must be binding and protected. This is where a Contribution Agreement enters the scene. It's not just about putting things in black and white; it's about making sure everything is clear, precise, and enforceable. Here are some reasons why your business needs one:
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Navigating legal documents can be complex, but don't fret. Here's a breakdown of the common sections you might encounter:
| "The seller represents and warrants that he/she has the legal right to sell the assets described in this agreement and that no other person has any rights or interests in those assets." |
| “The Seller hereby transfers to the Buyer, and the Buyer hereby accepts from the Seller, all of Seller’s right, title and interest in and to all property located at 123 Main Street, Anytown, USA.” |
| “The Parties agree that they will enter into this Agreement on the date that all of the following conditions have been satisfied: (i) The Seller has received a check in the amount of $1,000,000 from Buyer; (ii) The Buyer has received a copy of all title policies and endorsements showing no outstanding encumbrances on said property; and (iii) An inspection has been completed by both parties and no material defects were found.” |
| “The Seller warrants that it is the sole owner of the Property and has the right to convey title free of any encumbrances. This warranty shall survive for 90 days after the date this Agreement becomes effective.” |
Drafting any contractual document requires a considerable understanding of legal jargon and principles. Yet, with the right knowledge and guidance, it becomes more manageable:
To start, clarify who is involved in the agreement. This isn't just about names - you need to write down the full legal names of all parties, their commercial registration number (if any), registered office addresses, and types of entity (for instance, LLC, Corporation, etc.) Ensure to specify the party that is contributing the assets (the "Contributor") and the party receiving the contribution (the "Company").
Now, let's tackle the asset at hand. You need to comprehensively detail the asset or cash being contributed. Avoid generalities. If it's a property, include its full address, size, and other relevant specifications. If it's cash, mention the exact amount. Then, assign a defined term to refer to these assets throughout the agreement, such as "Contribution".
For example, if the property is a house, you might include the following:
"Assets" include all real property owned by the company as of the date of this agreement, including but not limited to one (1) house located at 1600 Main Street, Austin, TX 78701."
Next, you need to determine what the Contributor will receive in exchange for the assets. This could be shares, a membership interest, etc., in the Company. State the exact quantity and class of these securities and assign a defined term to refer to these, such as "Securities". This might look like:
"The Contributor will receive one-half (1/2) of the Company's common stock, which shall be valued at $5 per share, or a total of $10,000."
You'll then need to detail any conditions precedent - things that must occur before the Contribution is made. These might include necessary approvals, accuracy of representations and warranties, or completion of due diligence. Example:
"The Company and the Contributor have each entered into this Agreement with the intention that it be effective upon execution. However, the Contributor's obligations under this Agreement will only become effective when all of the following conditions precedent are met: (1) The Contributors shall provide a representation letter to confirm that they are authorized to make such contribution; (2) The Board of Directors has approved this transaction in good faith; (3) There is no material adverse change in the business or operations of either party since signing this agreement."
This section is essentially the Contributor promising certain facts about the Contribution. For example, the Contributor might warrant it owns the Contribution, it's not subject to any liens, and so on. Keep in mind, this clauses needs to be factual and accurate. Otherwise you run the risk of having a court find that you've misrepresented the truth.
This is especially important with software, since many courts will not read source code to determine whether or not it's in compliance. So be sure to get any warranties and representations in writing and signed off by both parties. For example:
"The Contributor represents that it owns the Contributions and that the Contributions are not subject to any liens or encumbrances."
Now, you're at the point where you need to outline how and when the Contribution will be transferred to the Company. Determine if the transfer will happen all at once or in various stages. This might look like:
"The Transfer of Contributions is subject to the following conditions: (a) the Contributor must receive a written assignment from Company; (b) the Contributor must acknowledge and agree that its Contribution shall become part of the Work; (c) Company will provide Contributor with an appropriate form of acknowledgment for recordation with the appropriate governmental authority, if necessary; and (d) a statement will be included in the final documentation evidencing this transfer."
This clause determines which state's laws will govern the interpretation of the agreement and where any lawsuits must be filed. Generally, this would be the state where your business is located. For example:
"This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois, without giving effect to any principles of conflicts of law. Any action arising out of or relating to this Agreement shall be filed only in courts located in Cook County, Illinois."
Don't skip this crucial step. Set out how disputes will be resolved, be it via mediation, arbitration, or court proceedings. A clearly detailed and agreed-upon process can save headaches down the road. Failure to do so might open you up to a number of legal challenges, as well as hurting your credibility with clients. For example:
"Any dispute arising out of or relating to this Agreement shall be settled by arbitration in accordance with the rules of the American Arbitration Association."
Finally, at the end of the agreement, include space for the date and the parties' signatures, to finalize your Contribution Agreement.
We learn from our mistakes. But in legal agreements, it's best to learn from others:
Running your business comes with many challenges, and one of those is navigating legalities. But with a roadmap that shows you the important aspects such as the Contribution Agreement for Cash or Assets, you're on the right path. Remember, every legal agreement is an asset for your business that provides clarities and protections.
Need a contribution agreement template? Get it right here. Simplify navigating through these complex waters with our handy template. Let them guide you through this journey!
The biggest question now is, "Do you need to hire a lawyer for help?" Sometimes, yes (especially if you have multiple owners). But often for single-owner businesses, you don't need a lawyer to start your business.
Many business owners instead use tools like Legal GPS for Business, which includes a step-by-step, interactive platform and 100+ contract templates to help you start and grow your company.
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