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 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 authority 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 your company that they will maintain “true books and records of account” in a system of accounting in keeping with accepted accounting systems. The company also must covenant if the end of each fiscal year it will furnish to every stockholder an equilibrium sheet of the company, revealing the financials of enterprise such as gross revenue, losses, profit, and cash flow. The company will also provide, in advance, an annual budget for every year using 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 ability to purchase a pro rata share of any new offering of equity securities using the company. Which means that the company must provide ample notice towards the shareholders of the equity offering, and permit each shareholder a fair bit of with regard to you exercise their particular right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise her / his right, in contrast to the company shall have a choice to sell the stock to more events. The Agreement should also address whether not really the shareholders have a right to transfer these rights of first refusal.
There as well special rights usually awarded to large venture capitalist investors, like the right to elect an of the firm’s directors and also the right to participate in manage of any shares created by the founders of supplier (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, remember rights embodied in an Investors’ Rights Agreement are the right to join one’s stock with the SEC, the ideal to receive information for the company on a consistent basis, and proper to purchase stock any kind of new issuance.