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 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 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 via the company which they will maintain “true books and records of account” in the system of accounting consistent with accepted accounting systems. The also must covenant that whenever the end of each fiscal year it will furnish every single stockholder a balance sheet from the company, revealing the financials of supplier such as gross revenue, losses, profit, and salary. The company will also provide, in advance, an annual budget each and every year using a financial report after each fiscal one 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 a pro rata share of any new offering of equity securities together with company. Which means that the company must records notice on the shareholders from the equity offering, and permit each shareholder a degree of a person to exercise his or her right. Generally, 120 days is given. If after 120 days the shareholder does not exercise her / his right, rrn 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 likewise special rights usually awarded to large venture capitalist investors, like the right to elect at least one of the company’s directors and the right to participate in generally of any shares completed by the founders of the company (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, view rights embodied in an Investors’ Rights Agreement are the right to join up one’s stock with the SEC, the ideal to receive information of the company on the consistent basis, and obtaining to purchase stock in any new issuance.