An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other way 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 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 through company that they can maintain “true books and records of account” in the system of accounting based on accepted accounting systems. The company also must covenant that anytime the end of each fiscal year it will furnish each and every stockholder an account balance sheet for the company, revealing the financials of enterprise such as gross revenue, losses, profit, and cash flow. The company will also provide, in advance, an annual budget for everybody year having 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 authority to purchase an experienced guitarist rata share of any new offering of equity securities from the company. This means that the company must records notice into the shareholders for this equity offering, and permit each shareholder a degree of with regard to you exercise his or her right. Generally, 120 days is handed. If after 120 days the shareholder does not exercise her / his right, rrn comparison to the company shall have alternative to sell the stock to more events. The Agreement should also address whether or the shareholders have a right to transfer these rights of first refusal.
There are also special rights usually awarded to large venture capitalist investors, like the right to elect an of the business’ directors and also the right to participate in manage of any shares created by the founders of the company (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, remember rights embodied in an Investors’ Rights Agreement would be right to join up one’s stock with the SEC, the correct to receive information at the company on a consistent basis, and proper to purchase stock in any new issuance.