An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other kind of securities. Investors’ Rights Agreements can cover several different rights awarded to the investors, depending on the agreement between the two parties. Almost always though the agreement will cover three basic investors’ rights: Registration rights, Information Rights, and Rights of First Refusal.
Registration Rights are contractual rights of holders of securities to have the transfer of those securities registered with the SEC under the Securities Act of 1933. In other words, Registration Rights entitle investors to force a firm’s to register shares of common stock issuable upon conversion of preferred stock with the Securities and Exchange Commission. A venture capitalist shareholder especially wants the ability to register his shares because registration provides it with the ability to freely sell the shares without complying with the restrictions of Rule 144.
In any solid Investors’ Rights Agreement, the investors will also secure a promise from the company that they will maintain “true books and records of account” from a system of accounting consistent with accepted accounting systems. The also must covenant that anytime the end of each fiscal year it will furnish each and every stockholder a balance sheet from the company, revealing the financials of enterprise such as gross revenue, losses, profit, and profits. The company will also provide, in advance, an annual budget for everybody year and a financial report after each fiscal 1 fourth.
Finally, the investors will almost always want to have a right of first refusal in the Agreement. This means that each major investor shall have the legal right to purchase an experienced guitarist rata share of any new offering of equity securities along with company. This means that the company must provide ample notice towards shareholders for the equity offering, and permit each shareholder a certain amount of a person to exercise their specific right. Generally, 120 days is handed. If after 120 days the shareholder does not exercise her own right, rrn comparison to the company shall have a choice to sell the stock to other parties. The Agreement should also address whether or the shareholders have the to transfer these rights of first refusal.
There as well special rights usually awarded to large venture capitalist investors, similar to the right to elect some form of of transmit mail directors and also the right to participate in in manage of any shares served by the founders of the company (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, the main rights embodied in an Investors’ Rights Agreement always be the right to join up to one’s stock with the SEC, the correct to receive information for the company on the consistent basis, and obtaining to purchase stock any kind of new issuance.