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 although the agreement will cover three basic investors’ rights: Registration rights, Information Rights, and Rights of First Refusal.
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 company 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’ll maintain “true books and records of account” in a system of accounting in line with accepted accounting systems. A lot more claims also must covenant that whenever the end of each fiscal year it will furnish each and every stockholder an account balance sheet of this 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 for everybody year together financial report after each fiscal three months.
Finally, the investors will almost always want to secure a right of first refusal in the Agreement. Which means that each major investor shall have the ability to purchase a professional rata share of any new offering of equity securities using the company. This means that the company must provide ample notice to the shareholders for this equity offering, and permit each shareholder a certain quantity of time to exercise any right. Generally, 120 days is handed. If after 120 days the shareholder does not exercise her own right, in contrast to the company shall have a choice to sell the stock to other parties. The Agreement should also address whether or not the shareholders have the 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 some form of of youre able to send directors along with the right to participate in in selling of any shares completed by the founders of the business (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, view rights embodied in an Investors’ Rights Agreement are the right to join up one’s stock with the SEC, significance to receive information of the company on a consistent basis, and good to purchase stock any kind of new issuance.