Key Definitive Document Agreements

4 minutes, 2 links


Updated August 29, 2023
Angel Investing

You’re reading an excerpt of Angel Investing: Start to Finish, a book by Joe Wallin and Pete Baltaxe. It is the most comprehensive practical and legal guide available, written to help investors and entrepreneurs avoid making expensive mistakes. Purchase the book to support the authors and the ad-free Holloway reading experience. You get instant digital access, commentary and future updates, and a high-quality PDF download.

We’ve discussed some of the definitive documents specific to the different types of angel investment types above. Below are definitive document agreements that can be associated with a broad range of financings.

Voting Agreement

A Voting Agreement is an agreement between the voting stockholders of a company in which the parties agree to vote their shares in a particular fashion to ensure that certain persons or their designees are elected to the board of directors. The agreement must be signed by the stockholders, because under corporate law it is the shareholders who elect the directors of the company; if your agreement is just with the company your right will not be enforceable.

exampleA two-person company is owned 60% by one person and 40% by the other. The two parties could agree that they would each vote their shares to elect each other to the board of directors. This would ensure that the 60% owner cannot throw the 40% owner off the board.

exampleSuppose there is a company comprised of three equal owners. Absent a Voting Agreement, any two owners can throw the third owner off the board and out of the company. With a Voting Agreement, they can each agree to vote their shares to elect each other to the board. This wouldn’t prevent the board, by a two to one vote, from terminating the employment of one of the owners, but it would prevent the one terminated owner from being thrown off the board of directors.

cautionIf a company agrees to appoint you to its board of directors, that agreement is probably not enforceable, because only the stockholders of a company can agree to elect you to its board of directors, not the company.

exampleYou want to negotiate for a board seat of a company you are investing in. In the term sheet, the company agrees to enter into an agreement with you to appoint you to the board. Immediately after the closing, the existing board of directors passed a resolution increasing the size of the board by one person and appointing you to fill the vacancy. You got what you wanted; you are on the board. But at the next annual meeting of shareholders, a majority of the shareholders vote for an entirely different board, and you are thrown off. You go to your lawyer, and ask if he will start a lawsuit to enforce your right to a board seat. Your lawyer tells you: “Your agreement with the company is not enforceable. For it to be enforceable, you need that agreement to take the form of a Voting Agreement signed by a majority of the shareholders.”

Investor Rights Agreement

An Investor Rights Agreement typically includes covenants or ongong promises on the part of the Company to provide the investors with certain rights. Those rights could include registration rights, participation rights, information rights, observer rights, inspections rights, protective provisions, and other covenants. The voting agreement may be part of the Investor Rights Agreement.

A good example of an Investor Rights Agreement can be found at NVCA.

The Investor Rights Agreement may contain protective provisions. Protective provisions are special voting agreement provisions which require a company, before it can take certain actions, to obtain the separate approval of a particular group of shareholders.

If you invest in Series Seed Preferred Stock, the typical protective provisions can be found in an example term sheet found at Series Seed.

If you found this post worthwhile, please share!