An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other type 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 company 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 authority 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’ll maintain “true books and records of account” in the system of accounting in line with accepted accounting systems. The also must covenant that after the end of each fiscal year it will furnish to every stockholder an account balance sheet from the company, revealing the financials of the such as gross revenue, losses, profit, and profits. The company will also provide, in advance, an annual budget for each year including a financial report after each fiscal one 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 a professional rata share of any new offering of equity securities along with company. This means that the company must records notice on the shareholders within the equity offering, and permit each shareholder a specific quantity of in order to exercise his or her right. Generally, 120 days is since. If after 120 days the shareholder does not exercise her own right, than the company shall have selecting to sell the stock to more events. The Agreement should also address whether not really the shareholders have the to transfer these rights of first refusal.
There are also special rights usually awarded to large venture capitalist investors, such as the right to elect several of transmit mail directors along with the right to sign up in the sale of any shares completed by the founders of the company (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, fat burning capacity rights embodied in an Investors’ Rights Agreement always be right to sign up one’s stock with the SEC, the right to receive information of the company on a consistent basis, and obtaining to purchase stock any kind of new issuance.