An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other type 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 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 that they may maintain “true books and records of account” in the system of accounting in keeping with accepted accounting systems. Corporation also must covenant that whenever the end of each fiscal year it will furnish every single stockholder an equilibrium sheet belonging to the company, revealing the financials of the company such as gross revenue, losses, profit, and net income. 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 right to purchase an experienced guitarist rata share of any new offering of equity securities using the company. This means that the company must records notice towards the shareholders within the equity offering, and permit each shareholder a degree of time to exercise any right. Generally, 120 days is since. If after 120 days the shareholder does not exercise his or her right, n comparison to the company shall have the option to sell the stock to more events. The Agreement should also address whether or not the shareholders have the to transfer these rights of first refusal.
There will also special rights usually awarded to large venture capitalist investors, for example , right to elect several of the business’ directors and also the right to participate in in selling of any shares completed 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 sign up one’s stock with the SEC, the correct to receive information in the company on the consistent basis, and proper to purchase stock any kind of new issuance.