An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other form 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 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 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 through company that they’ll maintain “true books and records of account” in a system of accounting in line with accepted accounting systems. The also must covenant if the end of each fiscal year it will furnish each and every stockholder an equilibrium sheet for the company, revealing the financials of enterprise such as gross revenue, losses, profit, and monetary. The company will also provide, in advance, an annual budget for everybody year together financial report after each fiscal 1 fourth.
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 together with company. This means that the company must records notice to the shareholders of the equity offering, and permit each shareholder a certain quantity of a person to exercise their particular right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise because their right, versus the company shall have the option 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 as well special rights usually awarded to large venture capitalist investors, like the right to elect an of youre able to send directors and the right to participate in in selling of any shares served by the founders of the business (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, remember rights embodied in an Investors’ Rights Agreement are the right to join up one’s stock with the SEC, the right to receive information at the company on the consistent basis, and good to purchase stock any kind of new issuance.