An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other form of securities. Investors’ Rights Agreements can cover several different rights awarded to the investors, depending on the agreement between the two parties. Almost always although 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 professional 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 legal right 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 may maintain “true books and records of account” in a system of accounting consistent with accepted accounting systems. A lot more claims also must covenant that after the end of each fiscal year it will furnish every single stockholder an equilibrium sheet of this company, revealing the financials of the such as gross revenue, losses, profit, and monetary. The company will also provide, in advance, an annual budget every year having a financial report after each fiscal three months.
Finally, the investors will almost always want to secure a right of first refusal in the Agreement. This means that each major investor shall have the authority to purchase a pro rata share of any new offering of equity securities from the company. Which means that the company must provide ample notice towards shareholders from the equity offering, and permit each shareholder a certain amount of time exercise any right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise his or her right, versus the company shall have selecting to sell the stock to other parties. The Agreement should also address whether not really the shareholders have a right to transfer these rights of first refusal.
There as well special rights usually awarded to large venture capitalist investors, including right to elect at least one of transmit mail directors and also the right to participate in the sale of any shares served by the founders of the business (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, keep in mind rights embodied in an Investors’ Rights Agreement the actual right to join one’s stock with the SEC, the correct to receive information for the company on the consistent basis, and good to purchase stock any kind of new issuance.