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 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 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 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” in a system of accounting in keeping with accepted accounting systems. The company also must covenant that after the end of each fiscal year it will furnish to each stockholder an equilibrium sheet belonging to 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 everybody year using a financial report after each fiscal 1 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 ability to purchase an expert rata share of any new offering of equity securities from the company. This means that the company must provide ample notice into the shareholders of the equity offering, and permit each shareholder a fair bit of with regard to you exercise their specific right. Generally, 120 days is with. If after 120 days the shareholder does not exercise your right, in contrast to the company shall have selecting to sell the stock to other parties. The Agreement should also address whether or not the shareholders have the to transfer these rights of first refusal.
There as well special rights usually awarded to large venture capitalist investors, similar to the right to elect an of the company’s directors along with the right to sign up in generally of any shares created by the founders of the business (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, keep in mind rights embodied in an Investors’ Rights Agreement always be the right to join up one’s stock with the SEC, the right to receive information at the company on a consistent basis, and the right to purchase stock any kind of new issuance.