An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other form 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 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 that they may maintain “true books and records of account” in the system of accounting consistent with accepted accounting systems. Corporation also must covenant that anytime the end of each fiscal year it will furnish to 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 everybody year together financial report after each fiscal 1 fourth.
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 along with company. Which means that the company must provide ample notice towards shareholders within the equity offering, and permit each shareholder a fair bit of in order to exercise his or her right. Generally, 120 days is given. If after 120 days the shareholder does not exercise his or her right, rrn comparison to the company shall have selecting to sell the stock to other parties. The Agreement should also address whether not really the shareholders have the to transfer these rights of first refusal.
There as well special rights usually awarded to large venture capitalist investors, like the right to elect several of transmit mail directors and also the right to participate in in the sale of any shares expressed by the founders of supplier (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, the main rights embodied in an Investors’ Rights Agreement are the right to join one’s stock with the SEC, the ideal to receive information of the company on the consistent basis, and obtaining to purchase stock any kind of new issuance.