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 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 small business 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 via the company which they will maintain “true books and records of account” within a system of accounting consistent with accepted accounting systems. Supplier also must covenant that after the end of each fiscal year it will furnish to every stockholder a balance sheet for 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 each and every year including a financial report after each fiscal one fourth.
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 legal right to purchase a professional rata share of any new offering of equity securities from the company. Which means that the company must provide ample notice into the shareholders for this equity offering, and permit each shareholder a certain quantity of time to exercise his or her right. Generally, 120 days is since. If after 120 days the shareholder does not exercise her own right, n comparison to the company shall have picking to sell the stock to more events. The Agreement should also address whether or the shareholders have the to transfer these rights of first refusal.
There furthermore special rights usually awarded to large venture capitalist investors, including right to elect one or more of the business’ directors and the right to participate in in generally of any shares made by the founders of the particular (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, remember rights embodied in an Investors’ Rights Agreement the actual right to join one’s stock with the SEC, significance to receive information for the company on the consistent basis, and obtaining to purchase stock any kind of new issuance.