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 although 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 firm’s 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 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 from the company that they may maintain “true books and records of account” within a system of accounting in step with accepted accounting systems. The company also must covenant if the end of each fiscal year it will furnish each and every stockholder an account balance sheet from the company, revealing the financials of an additional such as gross revenue, losses, profit, and salary. The company will also provide, in advance, an annual budget for each year and a financial report after each fiscal fraction.
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 a professional rata share of any new offering of equity securities using the company. Which means that the company must records notice to the shareholders from the equity offering, and permit each shareholder a certain amount of time exercise his or her right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise your right, in contrast to the company shall have selecting to sell the stock to more events. The Agreement should also address whether or even otherwise the shareholders have a right to transfer these rights of first refusal.
There are also special rights usually awarded to large venture capitalist investors, including right to elect one or more of the firm’s directors and also the right to sign up in the sale of any shares served by the founders of supplier (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, fat burning capacity rights embodied in an Investors’ Rights Agreement always be the right to sign up one’s stock with the SEC, the right to receive information at the company on the consistent basis, and obtaining to purchase stock any kind of new issuance.