An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other way 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 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 through company which they will maintain “true books and records of account” within a system of accounting in keeping with accepted accounting systems. Corporation also must covenant if the end of each fiscal year it will furnish to every stockholder a balance sheet belonging to the 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 every year including a financial report after each fiscal quarter.
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 authority 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 certain quantity of time to exercise his or her right. Generally, 120 days is since. If after 120 days the shareholder does not exercise because their right, versus the company shall have selecting to sell the stock to other parties. The Agreement should also address whether or the shareholders have the to transfer these rights of first refusal.
There as well special rights usually awarded to large venture capitalist investors, similar to the right to elect an of the firm’s directors and the right to participate in manage of any shares completed by the founders of organization (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, fat burning capacity rights embodied in an Investors’ Rights Agreement always be the right to register one’s stock with the SEC, the ideal to receive information about the company on the consistent basis, and obtaining to purchase stock any kind of new issuance.