An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other form 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 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 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 coming from a company that they may maintain “true books and records of account” in a system of accounting based on accepted accounting systems. A lot more claims also must covenant if the end of each fiscal year it will furnish to each stockholder an account balance sheet from the company, revealing the financials of the company such as gross revenue, losses, profit, and salary. The company will also provide, in advance, an annual budget for each year together financial report after each fiscal one fourth.
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 along with company. Which means that the company must provide ample notice towards shareholders within the equity offering, and permit each shareholder a specific quantity of a person to exercise their specific right. Generally, 120 days is handed. If after 120 days the shareholder does not exercise his or her right, rrn comparison to the company shall have alternative to sell the stock to other parties. The Agreement should also address whether or the shareholders have a right to transfer these rights of first refusal.
There will also special rights usually awarded to large venture capitalist investors, such as the right to elect some form of of transmit mail directors and also the right to participate in the sale of any shares served by the founders of supplier (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, the main rights embodied in an Investors’ Rights Agreement are the right to join one’s stock with the SEC, significance to receive information about the company on a consistent basis, and good to purchase stock in any new issuance.