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 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 which they will maintain “true books and records of account” within a system of accounting in keeping with accepted accounting systems. Corporation also must covenant that anytime the end of each fiscal year it will furnish each stockholder a 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 every year including a financial report after each fiscal quarter.
Finally, the investors will almost always want to secure 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 together with company. This means that the company must provide ample notice towards shareholders for the equity offering, and permit each shareholder a certain amount of a person to exercise their particular right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise his or her right, versus the company shall have alternative to sell the stock to other parties. The Agreement should also address whether or the shareholders have the to transfer these rights of first refusal.
There furthermore special rights usually awarded to large venture capitalist investors, such as the right to elect several of transmit mail directors and also the right to participate in generally of any shares expressed by the founders of the particular (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, fat burning capacity rights embodied in an Investors’ Rights Agreement would be right to join up one’s stock with the SEC, proper way to receive information in the company on the consistent basis, and property to purchase stock any kind of new issuance.