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 although 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 legal 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 may maintain “true books and records of account” in a system of accounting in step with accepted accounting systems. The company also must covenant if the end of each fiscal year it will furnish each and every stockholder an equilibrium sheet from the company, revealing the financials of supplier such as gross revenue, losses, profit, and cash flow. The company will also provide, in advance, an annual budget for every year using 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. Which means that each major investor shall have the right to purchase a pro rata share of any new offering of equity securities from the company. This means that the company must provide ample notice towards shareholders of 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 your right, n comparison to the company shall have a choice to sell the stock to other parties. The Agreement should also address whether not really the shareholders have the to transfer these rights of first refusal.
There as well special rights usually awarded to large venture capitalist investors, such as the right to elect one or more of the company’s directors and also the right to participate in in manage of any shares served 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 are the right to join up one’s stock with the SEC, significance to receive information about the company on the consistent basis, and the right to purchase stock in any new issuance.