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 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’ll maintain “true books and records of account” within a system of accounting in keeping with accepted accounting systems. The company also must covenant anytime the end of each fiscal year it will furnish each stockholder an account balance sheet for the company, revealing the financials of an additional such as gross revenue, losses, profit, and profits. The company will also provide, in advance, an annual budget every year together financial report after each fiscal quarter.
Finally, the investors will almost always want to have a right of first refusal in the Agreement. Which means that each major investor shall have the legal right to purchase an experienced guitarist rata share of any new offering of equity securities from the company. Which means that the company must provide ample notice into the shareholders for the equity offering, and permit each shareholder a fair bit of in order to exercise any right. Generally, 120 days is given. If after 120 days the shareholder does not exercise his or her right, rrn comparison to the company shall have picking to sell the stock to more events. 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 an of the business’ directors and also the right to participate in selling of any shares completed by the founders of organization (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, the main rights embodied in an Investors’ Rights Agreement are the right to join one’s stock with the SEC, significance to receive information of the company on a consistent basis, and good to purchase stock any kind of new issuance.