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 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 via the company that they can maintain “true books and records of account” from a system of accounting in step with accepted accounting systems. Supplier also must covenant that whenever the end of each fiscal year it will furnish to every stockholder a balance sheet from 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 for everybody year using a financial report after each fiscal fraction.
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 ability to purchase a professional rata share of any new offering of equity securities from the company. This means that the company must provide ample notice on the shareholders for this equity offering, and permit each shareholder a fair bit of a person to exercise as his or her right. Generally, 120 days is handed. If after 120 days the shareholder does not exercise his or her right, n comparison to the company shall have alternative to sell the stock to more events. The Agreement should also address whether or even otherwise the shareholders have a right to transfer these rights of first refusal.
There as well special rights usually awarded to large venture capitalist investors, for example , right to elect several of transmit mail directors as well as the right to participate in the sale of any shares expressed by the founders of organization (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, the main rights embodied in an Investors’ Rights Agreement are the right to register one’s stock with the SEC, the correct to receive information at the company on the consistent basis, and obtaining to purchase stock in any new issuance.