An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other involving 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 Rejection.
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 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 that they’ll maintain “true books and records of account” within a system of accounting consistent with accepted accounting systems. Corporation also must covenant anytime the end of each fiscal year it will furnish to every stockholder a balance sheet of this company, revealing the financials of the company such as gross revenue, losses, profit, and cash flow. The company will also provide, in advance, an annual budget for every year and 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. Which means that each major investor shall have the right to purchase a professional rata share of any new offering of equity securities along with company. Which means that the company must records notice to the shareholders from the equity offering, and permit each shareholder a specific quantity of time to exercise as his or her right. Generally, 120 days is given. If after 120 days the shareholder does not exercise his or her right, n comparison to the company shall have a choice to sell the stock to other parties. The Agreement should also address whether or even otherwise the shareholders have a right to transfer these rights of first refusal.
There will also special rights usually awarded to large venture capitalist investors, such as the right to elect an of the business’ directors as well as the right to sign up in manage of any shares created by the founders of the business (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, the main rights embodied in an Investors’ Rights Agreement the actual right to join up to one’s stock with the SEC, the correct to receive information at the company on a consistent basis, and property to purchase stock in any new issuance.