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 ability 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 that they’ll maintain “true books and records of account” from a system of accounting in keeping with accepted accounting systems. Corporation also must covenant anytime the end of each fiscal year it will furnish each stockholder a balance sheet from the company, revealing the financials of supplier 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 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 a professional rata share of any new offering of equity securities along with company. This means that the company must records notice to the shareholders from the equity offering, and permit each shareholder a specific quantity of a person to exercise as his or her right. Generally, 120 days is handed. If after 120 days the shareholder does not exercise her / his right, than the company shall have selecting to sell the stock to other parties. The Agreement should also address whether or even otherwise the shareholders have a right to transfer these rights of first refusal.
There are also special rights usually awarded to large venture capitalist investors, similar to the right to elect at least one of the company’s directors along with the right to sign up in manage of any shares expressed by the founders of supplier (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, keep in mind rights embodied in an Investors’ Rights Agreement the actual right to register one’s stock with the SEC, the ideal to receive information of the company on the consistent basis, and obtaining to purchase stock in any new issuance.