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 professional 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 via the company that they will maintain “true books and records of account” in a system of accounting consistent with accepted accounting systems. The also must covenant that anytime the end of each fiscal year it will furnish to every 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 1 fourth.
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 right to purchase an expert rata share of any new offering of equity securities together with company. Which means that the company must records notice into the shareholders within the equity offering, and permit each shareholder a fair bit of a person to exercise his or her right. Generally, 120 days is given. If after 120 days the shareholder does not exercise her / his right, versus the company shall have a choice to sell the stock to more events. The Agreement should also address whether or even otherwise the shareholders have the to transfer these rights of first refusal.
There likewise special rights usually awarded to large venture capitalist investors, including right to elect an of transmit mail directors and also the right to participate in in the sale of any shares made by the founders of the company (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 right to join up to one’s stock with the SEC, the correct to receive information for the company on a consistent basis, and good to purchase stock in any new issuance.