An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other involving 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 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 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 through company that they can maintain “true books and records of account” from a system of accounting based on accepted accounting systems. The also must covenant that whenever the end of each fiscal year it will furnish each and every stockholder an account balance sheet of the company, revealing the financials of enterprise such as gross revenue, losses, profit, and monetary. The company will also provide, in advance, an annual budget for every year together financial report after each fiscal fraction.
Finally, the investors will almost always want to have a right of first refusal in the Agreement. This means that each major investor shall have the authority to purchase an expert rata share of any new offering of equity securities together with company. This means that the company must provide ample notice to the shareholders within the equity offering, and permit each shareholder a degree of a person to exercise as his or her right. Generally, 120 days is since. If after 120 days the shareholder does not exercise her / his right, versus the company shall have the option to sell the stock to other parties. The Agreement should also address whether or not the shareholders have a right to transfer these rights of first refusal.
There will also special rights usually awarded to large venture capitalist investors, similar to the right to elect several of the company’s directors as well as the right to participate in the sale of any shares completed by the founders of the business (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, fat burning capacity rights embodied in an Investors’ Rights Agreement are the right to join up one’s stock with the SEC, the right to receive information at the company on the consistent basis, and proper to purchase stock in any new issuance.