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 although 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 ability 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 may maintain “true books and records of account” in a system of accounting in keeping with 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 of the company, revealing the financials of the such as gross revenue, losses, profit, and salary. The company will also provide, in advance, an annual budget for every year having 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 together with company. Which means that the company must provide ample notice into the shareholders from the equity offering, and permit each shareholder a specific quantity of with regard to you exercise his or her right. Generally, 120 days is since. If after 120 days the shareholder does not exercise her own right, rrn comparison to the company shall have the option to sell the stock to other parties. The Agreement should also address whether or even otherwise the shareholders have the to transfer these rights of first refusal.
There as well special rights usually awarded to large venture capitalist investors, including right to elect several of the business’ directors along with the right to participate in selling of any shares created by the founders of the business (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, keep in mind rights embodied in an Investors’ Rights Agreement are the right to join up to one’s stock with the SEC, proper way to receive information of the company on a consistent basis, and obtaining to purchase stock any kind of new issuance.