What is Investor Rights Agreement Drafting?
An investor rights agreement is a legal contract between a company and its investors. Its purpose is to explain what rights are given to investors, providing clarity about how investors can hold equity in the company.
Read the rest of this article to learn how to draft an investor rights agreement so that you protect your interests and why it’s beneficial to hire a lawyer to draft it for you.
What Key Terms are Usually Found in an Investor Rights Agreement?
An investor rights agreement should state clear guidelines for how investors can protect themselves and what is expected of them. This serves to prevent disputes.
These are core components that usually appear in an investor rights agreement.
- Preemptive rights. This provides investors with the choice to buy a proportional share of future stock issuances by the company.
- Inspection rights. Investors want to be able to study the company’s records and accounts for transparency.
- Voting rights. There could be certain voting or consent rights the investor acquires so they can have a say on important company decisions.
- Protective provisions. The agreement must specify investor approval requirements for certain actions, such as if the company is sold or they’re issuing new securities.
- Transfer rights. This outlines when and how investors are allowed to transfer their shares.
- Confidentiality. This protects private company information by restricting how investors can access or share information.
- Termination. The agreement must specify when the agreement will end, how parties can end it early, and which rights will survive termination.
How Do You Draft an Investor Rights Agreement?
Here are some things to consider when drafting an investor rights agreement.
Explain What Investors Receive
If there are multiple investors included in the agreement, you should clearly state the rights available to all of them as this is the crux of the legal document. If you are making use of any special rights that are only available to certain investors, you should specify these.
Consider Future Funding Rounds
You should think about how future funding rounds will work when drafting agreement provisions. This includes pro-rata rights that give investors the right to purchase more shares in future financing rounds to preserve their percentage of ownership.
Include Confidentiality
You should explain how information that investors receive during the transaction will be protected. Define what constitutes confidential information and consider information that is shared verbally, such as via calls or during meetings. Outline the investor’s obligations, such as what measures they must follow to prevent unauthorized disclosure.
Align the Contract with Other Documents
You should ensure that the investor rights agreement is consistent with other relevant documents, such as shareholders’ agreements and subscription agreements. This prevents ambiguity that could result in disputes.
Maintain a Strong Focus
Since investor rights agreements can be detailed, stick to the central idea, which is to clearly state what rights investors have and when they can exercise them. The agreement should also touch on what happens if circumstances change, such as if there’s a dispute or a breach of terms.
Customize the Agreement
It’s common and recommended to customize your agreement to your specific investment, company, and applicable laws. For example, you could tailor the agreement to mention that different types of investors will receive different information or voting rights.
It’s non-negotiable to consider all laws and requirements for your specific agreement, which a lawyer can help you with.
Do You Need to Hire a Lawyer for Investor Rights Agreement Drafting?
Since investor rights agreements can be challenging to write if you don’t have strong contract-drafting experience, you should hire a lawyer for help.
Here’s what a reputable, experienced lawyer will do during the contract drafting process:
- They’ll review all investment terms and ensure the commercial agreement has clear, specific provisions.
- They’ll identify applicable investor rights and include provisions to protect them, such as with voting or consent rights.
- They’ll draft ownership thresholds to explain when investor rights apply.
- They’ll include confidentiality provisions to address how financial and other information can be used and protected.
- They’ll negotiate terms with the other parties if required. A lawyer will use their skills to ensure favorable terms for all concerned.
- They’ll review the first draft of an agreement you’ve written for clarity. They’ll evaluate if the agreement is enforceable and consistent with other documents, giving you peace of mind before you sign it.
Where to Find a Lawyer for Investor Rights Agreement Drafting
If you need to hire a lawyer to draft an investor rights agreement, you don’t have to take lots of time to find the right one. Online legal platforms make it easy and convenient to access a network of qualified lawyers who are experienced to help you.
ContractsCounsel is one of the largest online legal marketplaces that connects you to a network of vetted lawyers. All lawyers on the platform have contract writing and review experience.
Here are the steps to follow to request that a lawyer on the platform drafts an investor rights agreement:
- Go to the ContractsCounsel marketplace.
- Post your project for free. Include a few details to help you find the most suitable lawyer.
- Wait for lawyer bids. You’ll receive multiple bids from lawyers directly on the platform who are ready to work with you.
- Review the lawyers’ profiles. The platform provides extensive lawyer data to help you find the right lawyer, such as the lawyers’ location, client ratings for previous projects, expertise, and credentials.
- Connect with a lawyer you think is best suited to your requirements and hire them to draft your investor rights agreement for a flat fee.
