An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other form 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 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 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 from your company that they may maintain “true books and records of account” in the system of accounting based on accepted accounting systems. The also must covenant that anytime the end of each fiscal year it will furnish to every stockholder an equilibrium sheet for the company, revealing the financials of the company such as gross revenue, losses, profit, and profits. The company will also provide, in advance, an annual budget each and every year using 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 ability to purchase an experienced guitarist rata share of any new offering of equity securities along with company. This means that the company must provide ample notice towards the shareholders of the equity offering, and permit each shareholder a specific quantity of in order to exercise his or her right. Generally, 120 days is since. If after 120 days the shareholder does not exercise her / his right, n comparison to the company shall have picking 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 will also special rights usually awarded to large venture capitalist investors, similar to the right to elect one or more of youre able to send directors and the right to sign up in manage of any shares created by the founders of the business (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, remember rights embodied in an Investors’ Rights Agreement always be right to join up to one’s stock with the SEC, the right to receive information about the company on a consistent basis, and the right to purchase stock in any new issuance.