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 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 small business 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 through company that they may maintain “true books and records of account” from a system of accounting in line with accepted accounting systems. The also must covenant that whenever the end of each fiscal year it will furnish to each stockholder an account balance sheet of this company, revealing the financials of the company such as gross revenue, losses, profit, and profits. The company will also provide, in advance, an annual budget each and every year using a financial report after each fiscal one fourth.
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 ability to purchase an experienced guitarist rata share of any new offering of equity securities along with company. This means that the company must provide ample notice into the shareholders for the equity offering, and permit each shareholder a specific quantity of in order to exercise their specific right. Generally, 120 days is handed. 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 or even otherwise the shareholders have a right to transfer these rights of first refusal.
There furthermore special rights usually awarded to large venture capitalist investors, such as the right to elect one or more of transmit mail directors and also the right to sign up in selling of any shares served 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 right to join up to one’s stock with the SEC, the right to receive information at the company on the consistent basis, and obtaining to purchase stock in any new issuance.