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 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 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 through company that they’ll maintain “true books and records of account” in a system of accounting in step with accepted accounting systems. Supplier also must covenant anytime the end of each fiscal year it will furnish every single stockholder an account balance sheet belonging to 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 including a 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 by the company. Which means that the company must provide ample notice towards the shareholders for this equity offering, and permit each shareholder a certain amount of with regard to you exercise as his or her right. Generally, 120 days is given. If after 120 days the shareholder does not exercise because their right, in contrast to the company shall have the option to sell the stock to other parties. The Agreement should also address whether or the shareholders have a right to transfer these rights of first refusal.
There furthermore special rights usually awarded to large venture capitalist investors, including right to elect several of the business’ directors along with the right to sign up in manage of any shares expressed by the founders of the company (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, the main rights embodied in an Investors’ Rights Agreement always be right to register one’s stock with the SEC, the correct to receive information of the company on the consistent basis, and the right to purchase stock in any new issuance.