An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other kind 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 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 via the company that they’ll maintain “true books and records of account” in the system of accounting in keeping with accepted accounting systems. Supplier also must covenant anytime the end of each fiscal year it will furnish to every stockholder an account balance sheet from the company, revealing the financials of enterprise such as gross revenue, losses, profit, and net income. The company will also provide, in advance, an annual budget for each year using a financial report after each fiscal quarter.
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 ability to purchase an experienced guitarist rata share of any new offering of equity securities from the company. This means that the company must records notice on the shareholders of the equity offering, and permit each shareholder a certain amount of a person to exercise their particular right. Generally, 120 days is given. If after 120 days the shareholder does not exercise her own right, versus the company shall have alternative to sell the stock to other parties. The Agreement should also address whether not really 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 an of the company’s directors as well as the right to participate in in manage of any shares served by the founders of the particular (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, fat burning capacity rights embodied in an Investors’ Rights Agreement the actual right to join up one’s stock with the SEC, significance to receive information for the company on the consistent basis, and good to purchase stock in any new issuance.