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 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 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” from a system of accounting in keeping with accepted accounting systems. The company also must covenant anytime the end of each fiscal year it will furnish each and every stockholder a balance sheet from 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 every year including 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 authority to purchase an experienced guitarist rata share of any new offering of equity securities from the company. This means that the company must provide ample notice into the shareholders from the equity offering, and permit each shareholder a certain quantity of time exercise their particular right. Generally, 120 days is since. If after 120 days the shareholder does not exercise her own right, in contrast to 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 will also special rights usually awarded to large venture capitalist investors, like the right to elect one or more of the firm’s directors and also the right to sign up in selling of any shares served by the founders of supplier (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, view rights embodied in an Investors’ Rights Agreement always be the right to join up to one’s stock with the SEC, the ideal to receive information for the company on the consistent basis, and proper to purchase stock in any new issuance.