There are several ways in which a private investor may choose to invest in your business.
The most common approach is through ordinary shares. You agree to a fixed cash investment from the investor and the number of shares that the investor receives in return. As a holder of ordinary shares, the investor is entitled to dividends and has the right to vote on company matters.
You will need the following legal documents when raising money through ordinary shares:
In a later stage of the business, an investor might want to choose to invest through preferred shares, which grant additional rights to the investor. This is more common in later series financing once the business has a predictable revenue stream. Typically, the invested amount is much larger.
A convertible note is a short-term loan that converts into equity. Investors loan money to a company, and, rather than receiving their money back with interest, they receive shares in the company's next round of funding, normally at a discount to the price paid by other investors in that round (typically around 15- 20% less). In short, these are debt instruments backed by the equity of the company.
You will need the following legal documents when raising money through a convertible note:
A private investor can invest in your company using a SAFE Agreement. It is a relatively new concept and is very similar to a convertible note. Essentially, it is an agreement whereby the investor provides capital to the company, and, in return, the company provides a warrant to issue shares to the investor at a later time and upon a specific event, such as at the next round of funding. In this case, use a SAFE Agreement.