Investor Rights Agreement (IRA) in Venture Financing: Ultimate Review Guide

Venture financing deals usually involve the signing of the following documents:

  1. Term Sheet: The term sheet is a non-binding document outlining the basic terms and conditions under which an investment will be made.
  2. Share Purchase Agreement (SPA): The SPA is a central document in any VC deal. It sets out the specific terms of the transaction, including the number of shares being sold, the price per share, and the total investment amount. This agreement also covers representations and warranties, conditions to closing, and indemnification provisions
  3. Disclosure Schedule for SPA: This schedule accompanies the SPA and provides specific disclosures related to the representations and warranties in the SPA. It often includes exceptions or additional details that qualify or explain these representations and warranties, which are vital for assessing risks and obligations.
  4. Voting Agreement: The voting agreement details how certain shareholders must vote their shares, particularly in the context of board composition, sale of the company, and other major corporate decisions. It's essential for maintaining investor rights and balancing interests among different shareholder classes.
  5. Investor Rights Agreement (IRA): This document outlines various rights and privileges granted to investors, including rights to information, registration rights, and other governance-related matters.
  6. Right of First Refusal / Co-sale Agreement: This agreement provides the company, and sometimes other shareholders, the right to buy shares before the selling shareholder can transfer them to a third party (Right of First Refusal). It may also allow shareholders to join in on a sale (Co-sale).
  7. Certificate of Incorporation: Outlining the rights and privileges associated with preferred stock, which is commonly issued to venture investors.

In this guide, we will focus on the Investor Rights Agreements. Our goal is to provide comprehensive guidance for effectively reviewing, negotiating, and advising on the IRA in a VC deal.

Guides in Reviewing the IRA

  1. Registration Rights
    • Demand Registration Rights: Assess the conditions triggering these rights. Consider the company's stage and readiness for public offering.
    • Piggyback Registration Rights: Understand implications for existing shareholders, especially in terms of share value dilution.
    • Expenses and Indemnification: Clarify who bears the cost of registration and the extent of indemnification for both parties.
  2. Information Rights
    • Frequency and Type of Information: Determine if the frequency and depth of information sharing are practical and not overly burdensome.
    • Confidentiality: Ensure there are strict confidentiality clauses to protect sensitive information.
  3. Right of First Refusal and Co-Sale Agreement
    • Scope and Trigger Events: Identify scenarios activating these rights, and their impact on the company's liquidity and transferability of shares.
    • Exceptions: Look for exceptions that might limit these rights and understand their implications.
  4. Voting Rights
    • Allocation and Impact: Analyze the distribution of voting rights and its influence on company decision-making.
    • Protective Provisions: Identify any decisions requiring a special majority or investor approval.
  5. Drag-Along Rights
    • Thresholds and Conditions: Examine the specific conditions under which these rights can be exercised.
    • Minority Shareholder Protection: Ensure there are safeguards for minority shareholders against unfair compulsory sales.
  6. Anti-Dilution Provisions
    • Type of Anti-Dilution Protection: Differentiate between full-ratchet and weighted average provisions, and assess their appropriateness.
    • Trigger Events: Understand events that trigger anti-dilution adjustments and their implications on share valuation.
  7. Liquidation Preferences
    • Preference Multiple: Evaluate the multiple and its fairness in different exit scenarios.
    • Participation Rights: Determine if investors have the right to participate in the proceeds beyond their preference.
  8. Board Composition
    • Balance of Power: Assess how the composition impacts the balance of power between founders, investors, and other stakeholders.
    • Independent Directors: Consider the role and influence of independent directors in governance.
  9. Protective Provisions
    • Scope of Veto Rights: Identify key decisions requiring investor approval and assess their impact on company agility.
    • Amendments and Waivers: Understand the process for amending these provisions.
  10. Conflict of Interest Policy
    • Disclosure Requirements: Review requirements for disclosing potential conflicts.
    • Resolution Mechanisms: Examine how conflicts of interest are resolved to ensure fairness and transparency

Related Articles:

  1. Term Sheet in Venture Financing: Ultimate Practical Review Guide (https://www.legalnowai.com/pages/term-sheet-in-venture-financing)

  2. Share Purchase Agreement: Ultimate Practical Review Guide (https://www.legalnowai.com/pages/share-purchase-agreement-review-guide)

  3. Voting Agreements and Right of First Refusal / Co-sale Agreements: Ultimate Practical Review Guide (https://www.legalnowai.com/pages/voting-and-right-of-first-refusal-agreement-review-guide)

  4. Certificate of Incorporation in Venture Financing: Ultimate Practical Review Guide (https://www.legalnowai.com/pages/certificate-of-incorporation-agreement-review-guide)