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 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 legal 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 that they can maintain “true books and records of account” within a system of accounting based on accepted accounting systems. The also must covenant that anytime the end of each fiscal year it will furnish each and every stockholder an equilibrium sheet for the company, revealing the financials of the company such as gross revenue, losses, profit, and profits. The company will also provide, in advance, an annual budget each and every year having a financial report after each fiscal one fourth.
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 right to purchase an expert rata share of any new offering of equity securities from the company. This means that the company must records notice into the shareholders of the equity offering, and permit each shareholder a fair bit of time to exercise their specific right. Generally, 120 days is with. If after 120 days the shareholder does not exercise her / his right, in contrast to the company shall have alternative 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 likewise special rights usually awarded to large venture capitalist investors, such as the right to elect some form of of youre able to send directors and the right to participate in in the sale of any shares completed by the founders of supplier (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, keep in mind rights embodied in an Investors’ Rights Agreement would be right to join one’s stock with the SEC, significance to receive information in the company on a consistent basis, and good to purchase stock in any new issuance.