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What you should know before entering an Investor Rights Agreement

On Behalf of | Feb 22, 2023 | Business Law |

Attracting an investor is a huge accomplishment for a small business. It helps the company boost its brand while giving its owner a sense of pride that their business idea, product or service is worth funding. But before the investment relationship begins, the parties must enter into a contract.

But which one?

An investor-investee contract

An Investor Rights Agreement (IRA) is an agreement between an investor and a company that outlines the rights and responsibilities of each party. For instance, the document outlines the rights the investor may have such as rights to voting, inspection and right of first refusal as well as their responsibilities under the partnership.

This agreement offers protection for both the investor and the business.

Overview of inclusions

The contract should clearly specify the terms of the investment which may include, but are not limited to:

  • Mode of investment. While most funding comes in various monetary forms such as cash, check and wire transfer, some come in the form of tangible assets.
  • The length of the partnership. This refers to the length of time that the agreement will be valid.
  • Details of the ROI. This specifies how much the investor will receive in return and when they will receive it.
  • Amount of investment. This is how much the investor will fund the company.
  • Date of transfer of investment. This is when the investor will transfer their investment.

The agreement may also address more complex clauses such as the terms in case of dissolution or bankruptcy.

Establishing an IRA allows the company and the investor to feel comfortable with the setup by protecting their rights.