An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other involving 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 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 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 your company which they will maintain “true books and records of account” in the system of accounting based on accepted accounting systems. The also must covenant if the end of each fiscal year it will furnish each and every stockholder an equilibrium sheet from the company, revealing the financials of an additional such as gross revenue, losses, profit, and net income. The company will also provide, in advance, an annual budget for every year using a financial report after each fiscal quarter.
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 legal right to purchase an experienced guitarist rata share of any new offering of equity securities using the company. This means that the company must records notice into the shareholders for this equity offering, and permit each shareholder a certain amount of time exercise their particular right. Generally, 120 days is with. If after 120 days the shareholder does not exercise her / his right, versus the company shall have selecting to sell the stock to other parties. The Agreement should also address whether or even otherwise the shareholders have the to transfer these rights of first refusal.
There likewise special rights usually awarded to large venture capitalist investors, such as the right to elect several of the company’s directors as well as the right to participate in manage of any shares served by the founders of the company (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, the main rights embodied in an Investors’ Rights Agreement always be right to join up to one’s stock with the SEC, significance to receive information at the company on a consistent basis, and good to purchase stock any kind of new issuance.