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 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 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 from the company which they will maintain “true books and records of account” in the system of accounting in keeping with accepted accounting systems. The company also must covenant that anytime the end of each fiscal year it will furnish each and every stockholder an account balance sheet for the company, revealing the financials of the company such as gross revenue, losses, profit, and net income. The company will also provide, in advance, an annual budget each and every year together financial report after each fiscal three months.
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 right 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 certain quantity of with regard to you exercise any right. Generally, 120 days is handed. If after 120 days the shareholder does not exercise his or her right, rrn comparison to the company shall have a choice to sell the stock to more events. 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, like the right to elect some form of of the company’s directors and the right to sign up in selling of any shares made by the founders of supplier (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 register one’s stock with the SEC, the correct to receive information about the company on a consistent basis, and obtaining to purchase stock in any new issuance.