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 although 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 legal 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 the company that they will maintain “true books and records of account” within a system of accounting in keeping with accepted accounting systems. The also must covenant that anytime the end of each fiscal year it will furnish every single stockholder an equilibrium sheet of the company, revealing the financials of an additional such as gross revenue, losses, profit, and cash flow. The company will also provide, in advance, an annual budget for each year using a financial report after each fiscal three months.
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 expert rata share of any new offering of equity securities using the company. Which means that the company must provide ample notice towards shareholders of the equity offering, and permit each shareholder a certain amount of time to exercise their specific right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise because their right, n comparison 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 are also special rights usually awarded to large venture capitalist investors, including right to elect at least one of youre able to send directors along with the right to sign up in selling of any shares completed by the founders of the company (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, remember rights embodied in an Investors’ Rights Agreement always be the right to join one’s stock with the SEC, the correct to receive information in the company on the consistent basis, and proper to purchase stock in any new issuance.