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 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 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 from the company which they will maintain “true books and records of account” in the system of accounting in step with accepted accounting systems. The company also must covenant that after the end of each fiscal year it will furnish to every stockholder an equilibrium sheet for the company, revealing the financials of enterprise such as gross revenue, losses, profit, and monetary. The company will also provide, in advance, an annual budget every year and a financial report after each fiscal quarter.
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 experienced guitarist rata share of any new offering of equity securities along with company. This means that the company must records notice to the shareholders of the equity offering, and permit each shareholder a specific quantity of time exercise their particular right. Generally, 120 days is since. If after 120 days the shareholder does not exercise his or her right, versus the company shall have alternative to sell the stock to other parties. The Agreement should also address whether not really the shareholders have the to transfer these rights of first refusal.
There will also special rights usually awarded to large venture capitalist investors, like the right to elect some form of of the firm’s directors along with the right to sign up in selling of any shares created by the founders of the particular (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, view rights embodied in an Investors’ Rights Agreement always be right to register one’s stock with the SEC, the ideal to receive information in the company on the consistent basis, and the right to purchase stock in any new issuance.