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 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 professional 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 which they will maintain “true books and records of account” from a system of accounting consistent with accepted accounting systems. Supplier also must covenant that whenever the end of each fiscal year it will furnish each stockholder an account balance sheet from the company, revealing the financials of the such as gross revenue, losses, profit, and net income. The company will also provide, in advance, an annual budget every 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 right to purchase a professional rata share of any new offering of equity securities together with company. Which means that the company must provide ample notice towards the shareholders from the equity offering, and permit each shareholder a fair bit of a person to exercise their specific right. Generally, 120 days is since. If after 120 days the shareholder does not exercise his or her right, than the company shall have selecting 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 as well special rights usually awarded to large venture capitalist investors, including right to elect several of youre able to send directors along with the right to sign up in generally of any shares served by the founders of organization (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, remember rights embodied in an Investors’ Rights Agreement always be right to join up to one’s stock with the SEC, the ideal to receive information about the company on the consistent basis, and obtaining to purchase stock any kind of new issuance.