An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other way 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 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 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 coming from a company that they’ll maintain “true books and records of account” from a system of accounting in keeping with accepted accounting systems. Supplier also must covenant anytime the end of each fiscal year it will furnish each and every stockholder a balance sheet belonging to the company, revealing the financials of the company such as gross revenue, losses, profit, and net income. The company will also provide, in advance, an annual budget every 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 ability to purchase a pro rata share of any new offering of equity securities together with company. This means that the company must provide ample notice towards shareholders from the equity offering, and permit each shareholder a certain quantity of time exercise their particular right. Generally, 120 days is handed. If after 120 days the shareholder does not exercise your right, rrn comparison 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, including right to elect some form of of the company’s directors and also the right to sign up in the sale of any shares created by the founders of the company (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, view rights embodied in an Investors’ Rights Agreement always be the right to register one’s stock with the SEC, significance to receive information for the company on the consistent basis, and proper to purchase stock in any new issuance.