An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other involving 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 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 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 the company that they may maintain “true books and records of account” in a system of accounting based on accepted accounting systems. The company also must covenant that whenever the end of each fiscal year it will furnish to each stockholder an account balance sheet of the company, revealing the financials of the such as gross revenue, losses, profit, and profits. The company will also provide, in advance, an annual budget for each year using a financial report after each fiscal quarter.
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 right to purchase a professional rata share of any new offering of equity securities from the company. This means that the company must provide ample notice on the shareholders for this equity offering, and permit each shareholder a degree of in order to exercise his or her right. Generally, 120 days is since. If after 120 days the shareholder does not exercise her own right, rrn comparison to the company shall have picking 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 as well special rights usually awarded to large venture capitalist investors, like the right to elect one or more of youre able to send directors along with the right to participate in in manage of any shares expressed by the founders of the particular (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, keep in mind rights embodied in an Investors’ Rights Agreement the actual right to join up to one’s stock with the SEC, the ideal to receive information in the company on a consistent basis, and obtaining to purchase stock any kind of new issuance.