What Is an Investor Rights Agreement?

You’ve closed your Series A. Alongside the stock purchase agreement, the amended and restated charter, a co-sale agreement and voting agreement, you signed what’s called an investor rights agreement (IRA). That document governs what your investors are entitled to from the company for years to come, so it pays to understand it before you sign.

IRAs show up most often in priced preferred stock rounds and are usually based on the National Venture Capital Association (NVCA) model documents. Angels investing through SAFEs or convertible notes generally don’t get one, though some negotiate similar rights in a side letter. Here’s what’s in a typical IRA and where the negotiating room is.

What’s Inside an Investor Rights Agreement

An IRA is a negotiated agreement between the company and its investors. It gives investors visibility and protection while leaving the company room to run the business. Common provisions include:

• Information rights. Access to annual and quarterly financial statements, budgets, and sometimes cap table updates and inspection rights. These usually go only to “Major Investors” who hold more than a negotiated threshold.
• Board observer rights. Some investors get the right to attend board meetings without a vote. Board seats themselves typically live in the voting agreement and the charter, not the IRA.
• Registration rights. The right to require the company to register investors’ shares with the SEC so they can sell them publicly, including demand rights and “piggyback” rights to join an offering the company files. These mostly matter around an IPO.
• Preemptive rights. Also called pro rata or participation rights, these let existing investors buy their share of new securities in future rounds before outsiders can. Don’t confuse them with a right of first refusal, which covers existing shareholders’ sales of their own stock and usually sits in a separate agreement.
• Company covenants. Promises about how the company will operate, such as maintaining D&O insurance, requiring employees to sign confidentiality and invention assignment agreements, and following agreed vesting terms for employee equity.

Almost every one of these terms is negotiable. Investors want visibility and protection. Founders want the flexibility to run the company without asking permission at every turn. The Major Investor threshold, the scope of information rights, and the list of covenants are where that balance gets struck.

Negotiate Your IRA With Someone Who’s Seen Both Sides

Whether you’re leading a round as an investor or signing your first IRA as a founder, the terms you agree to now will follow the company through every future financing. Triumph Law’s startup companies attorneys represent both companies and investors, so we know where the market is and which terms are worth fighting for. Contact us today to talk through your deal.

Source:

law.cornell.edu/wex/preemptive_right