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 Rejection.
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 small business 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 authority 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 consistent with accepted accounting systems. Supplier also must covenant that whenever the end of each fiscal year it will furnish to every stockholder an account balance sheet belonging to the company, revealing the financials of enterprise such as gross revenue, losses, profit, and net income. The company will also provide, in advance, an annual budget for each year and a financial report after each fiscal one fourth.
Finally, the investors will almost always want to have a right of first refusal in the Agreement. This means that each major investor shall have the legal right to purchase a pro rata share of any new offering of equity securities from the company. This means that the company must records notice into the shareholders within the equity offering, and permit each shareholder a fair bit of time exercise any right. Generally, 120 days is since. If after 120 days the shareholder does not exercise because their right, in contrast to the company shall have a choice to sell the stock to more events. The Agreement should also address whether or the shareholders have a right to transfer these rights of first refusal.
There furthermore special rights usually awarded to large venture capitalist investors, similar to the right to elect an of the company’s directors and also the right to sign up in generally of any shares expressed by the founders of the particular (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, keep in mind rights embodied in an Investors’ Rights Agreement are the right to register one’s stock with the SEC, significance to receive information for the company on the consistent basis, and property to purchase stock in any new issuance.