An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other way 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 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 right 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 may maintain “true books and records of account” in the system of accounting in step with accepted accounting systems. The company also must covenant that after the end of each fiscal year it will furnish to every stockholder an account balance sheet from the company, revealing the financials of enterprise such as gross revenue, losses, profit, and profits. The company will also provide, in advance, an annual budget for each year having 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. 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 into the shareholders within the equity offering, and permit each shareholder a fair bit of in order to exercise any right. Generally, 120 days is handed. If after 120 days the shareholder does not exercise her / his right, in contrast to the company shall have the option 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 likewise special rights usually awarded to large venture capitalist investors, including right to elect an of the company’s directors and the right to participate in in manage of any shares expressed by the founders of the particular (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, remember rights embodied in an Investors’ Rights Agreement would be right to join up to one’s stock with the SEC, proper way to receive information in the company on the consistent basis, and good to purchase stock any kind of new issuance.