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 professional 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” in the system of accounting based on accepted accounting systems. Corporation also must covenant that anytime the end of each fiscal year it will furnish every single stockholder a balance sheet belonging to the company, revealing the financials of enterprise such as gross revenue, losses, profit, and net income. The company will also provide, in advance, an annual budget for each year including 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. Which means that each major investor shall have the ability to purchase a pro rata share of any new offering of equity securities along with company. Which means that the company must records notice to the shareholders from the equity offering, and permit each shareholder a fair bit of in order to exercise any 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 not really the shareholders have the to transfer these rights of first refusal.
There likewise special rights usually awarded to large venture capitalist investors, for example , right to elect some form of of the company’s directors and also the right to sign up in the sale of any shares created by the founders of organization (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, keep in mind rights embodied in an Investors’ Rights Agreement the actual right to join one’s stock with the SEC, the correct to receive information in the company on a consistent basis, and the right to purchase stock any kind of new issuance.