An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other type 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 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 authority 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 coming from a company that they will maintain “true books and records of account” within a system of accounting consistent with accepted accounting systems. The also must covenant that whenever 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 net income. The company will also provide, in advance, an annual budget each and every year and a 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 an expert rata share of any new offering of equity securities from the company. This means that the company must provide ample notice to the shareholders for this equity offering, and permit each shareholder a degree of time to exercise their specific right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise your right, versus the company shall have a choice to sell the stock to more events. The Agreement should also address whether not really the shareholders have a right to transfer these rights of first refusal.
There furthermore special rights usually awarded to large venture capitalist investors, for example , right to elect at least one of the firm’s directors and also the right to sign up in selling of any shares completed by the founders of the company (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, view rights embodied in an Investors’ Rights Agreement the actual right to join one’s stock with the SEC, the ideal to receive information about the company on a consistent basis, and obtaining to purchase stock in any new issuance.