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 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 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 through company that they may maintain “true books and records of account” in a system of accounting based on accepted accounting systems. Corporation also must covenant that after the end of each fiscal year it will furnish each stockholder an account balance sheet for the company, revealing the financials of supplier such as gross revenue, losses, profit, and monetary. The company will also provide, in advance, an annual budget each and every year using a financial report after each fiscal fraction.
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 pro rata share of any new offering of equity securities using the company. This means that the company must records notice into the shareholders from the equity offering, and permit each shareholder a certain amount of a person to exercise their particular right. Generally, 120 days is given. If after 120 days the shareholder does not exercise her own right, n comparison to the company shall have selecting to sell the stock to other parties. The Agreement should also address whether or the shareholders have a right to transfer these rights of first refusal.
There as well special rights usually awarded to large venture capitalist investors, for example , right to elect several of the business’ directors and also the right to participate in the sale of any shares expressed by the founders of the particular (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, the ideal to receive information of the company on a consistent basis, and good to purchase stock in any new issuance.