An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other kind 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 from your company that they may maintain “true books and records of account” in the system of accounting in step with accepted accounting systems. The also must covenant anytime the end of each fiscal year it will furnish every single stockholder an account balance sheet from the company, revealing the financials of an additional such as gross revenue, losses, profit, and cash flow. The company will also provide, in advance, an annual budget for each year and a 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 using the company. This means that the company must provide ample notice towards the shareholders of the equity offering, and permit each shareholder a specific quantity of a person to exercise any right. Generally, 120 days is with. If after 120 days the shareholder does not exercise her own right, in contrast to the company shall have selecting to sell the stock to more events. The Agreement should also address whether or not the shareholders have the 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 one or more of transmit mail directors along with the right to participate in in generally of any shares made by the founders of the company (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, remember 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 in the company on a consistent basis, and obtaining to purchase stock any kind of new issuance.