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 Rejection.
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 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 via the company that they will maintain “true books and records of account” within a system of accounting in step with accepted accounting systems. Supplier also must covenant that anytime the end of each fiscal year it will furnish each and every stockholder an account balance sheet for the company, revealing the financials of enterprise such as gross revenue, losses, profit, and monetary. The company will also provide, in advance, an annual budget for everybody year together 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 expert rata share of any new offering of equity securities together with company. Which means that the company must provide ample notice towards the shareholders for this equity offering, and permit each shareholder a specific quantity of time to exercise any right. Generally, 120 days is given. If after 120 days the shareholder does not exercise your right, n comparison to the company shall have selecting to sell the stock to more events. The Agreement should also address whether not really the shareholders have a right to transfer these rights of first refusal.
There will also special rights usually awarded to large venture capitalist investors, similar to the right to elect several of the company’s directors as well as the right to sign up in selling of any shares expressed by the founders of the business (a so-called “Co Founder IP Assignement Ageement 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, the ideal to receive information in the company on the consistent basis, and good to purchase stock any kind of new issuance.