An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other type 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 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 ability 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 will maintain “true books and records of account” from a system of accounting in keeping with accepted accounting systems. The company also must covenant that whenever the end of each fiscal year it will furnish to each stockholder an equilibrium sheet of this 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 everybody year having 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. Which means that each major investor shall have the legal right to purchase an expert rata share of any new offering of equity securities using the company. This means that the company must provide ample notice towards the shareholders for the equity offering, and permit each shareholder a certain quantity of with regard to you exercise as his or her right. Generally, 120 days is given. If after 120 days the shareholder does not exercise her own right, than the company shall have picking to sell the stock to more events. The Agreement should also address whether not really the shareholders have the to transfer these rights of first refusal.
There will also special rights usually awarded to large venture capitalist investors, for example , right to elect several of the company’s directors and also the right to participate in in selling of any shares served by the founders of the particular (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, remember rights embodied in an Investors’ Rights Agreement would be right to register one’s stock with the SEC, significance to receive information of the company on the consistent basis, and proper to purchase stock in any new issuance.