An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other kind of securities. Investors’ Rights Agreements can cover several different rights awarded to the investors, depending on the agreement between the two parties. Almost always although 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 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 that they may maintain “true books and records of account” within a system of accounting consistent with accepted accounting systems. The company also must covenant that anytime the end of each fiscal year it will furnish each and every stockholder a 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 for each year having a financial report after each fiscal quarter.
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 using the company. This means that the company must records notice into the shareholders from the equity offering, and permit each shareholder a specific quantity of with regard to you 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 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 as well special rights usually awarded to large venture capitalist investors, including right to elect at least one of the company’s directors and also the right to sign up in the sale of any shares served by the founders of the company (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 register one’s stock with the SEC, significance to receive information at the company on a consistent basis, and the right to purchase stock any kind of new issuance.