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 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 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 through company that they can maintain “true books and records of account” within a system of accounting based on accepted accounting systems. The also must covenant that anytime the end of each fiscal year it will furnish each and every stockholder an account balance sheet of this company, revealing the financials of the such as gross revenue, losses, profit, and profits. The company will also provide, in advance, an annual budget every year together 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 right to purchase a professional rata share of any new offering of equity securities together with company. This means that the company must provide ample notice on the shareholders of the equity offering, and permit each shareholder a degree of a person to exercise as his or her right. Generally, 120 days is given. If after 120 days the shareholder does not exercise his or her right, in contrast to the company shall have the option to sell the stock to more events. The Agreement should also address whether or the shareholders have a right to transfer these rights of first refusal.
There likewise special rights usually awarded to large venture capitalist investors, including right to elect at least one of the firm’s directors and also the right to sign up in generally of any shares completed by the founders of supplier (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, keep in mind rights embodied in an Investors’ Rights Agreement always be the right to sign up one’s stock with the SEC, the ideal to receive information about the company on the consistent basis, and proper to purchase stock in any new issuance.