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 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 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 coming from a company which they will maintain “true books and records of account” in a system of accounting in keeping with accepted accounting systems. The company also must covenant anytime the end of each fiscal year it will furnish every single stockholder an account balance sheet belonging to the company, revealing the financials of enterprise such as gross revenue, losses, profit, and net income. The company will also provide, in advance, an annual budget for every year and a financial report after each fiscal 1 fourth.
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 ability to purchase an expert rata share of any new offering of equity securities together with company. Which means that the company must records notice towards shareholders for the equity offering, and permit each shareholder a degree of time exercise their specific right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise her own right, n comparison to the company shall have the option to sell the stock to other parties. The Agreement should also address whether or not the shareholders have a right to transfer these rights of first refusal.
There likewise special rights usually awarded to large venture capitalist investors, such as the right to elect at least one of the firm’s directors and the right to participate in in selling of any shares served by the founders of the business (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, remember rights embodied in an Investors’ Rights Agreement the actual right to sign up one’s stock with the SEC, significance to receive information for the company on the consistent basis, and the right to purchase stock any kind of new issuance.