An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other type 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 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 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 from the company that they can maintain “true books and records of account” within a system of accounting based on accepted accounting systems. Corporation also must covenant that whenever the end of each fiscal year it will furnish every single stockholder an account balance sheet from the company, revealing the financials of an additional such as gross revenue, losses, profit, and monetary. The company will also provide, in advance, an annual budget for every year including a financial report after each fiscal quarter.
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 legal right to purchase an experienced guitarist rata share of any new offering of equity securities using the company. This means that the company must provide ample notice to the shareholders of the equity offering, and permit each shareholder a fair bit of time to exercise their particular right. Generally, 120 days is since. If after 120 days the shareholder does not exercise her own right, versus the company shall have alternative to sell the stock to other parties. The Agreement should also address whether not really the shareholders have the to transfer these rights of first refusal.
There likewise special rights usually awarded to large venture capitalist investors, similar to the right to elect some form of of the firm’s directors and also the right to participate in in manage of any shares made by the founders of the particular (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, remember rights embodied in an Investors’ Rights Agreement the actual right to register one’s stock with the SEC, the ideal to receive information at the company on a consistent basis, and property to purchase stock in any new issuance.