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 although 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 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 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 from the company that they may maintain “true books and records of account” in the system of accounting consistent with accepted accounting systems. The company also must covenant that after the end of each fiscal year it will furnish to 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 for each year including a financial report after each fiscal fraction.
Finally, the investors will almost always want to have a right of first refusal in the Agreement. Which means that each major investor shall have the legal right to purchase an experienced guitarist rata share of any new offering of equity securities by the company. Which means that the company must provide ample notice into the shareholders of the equity offering, and permit each shareholder a fair bit of time to exercise his or her right. Generally, 120 days is with. If after 120 days the shareholder does not exercise because their right, versus the company shall have picking to sell the stock to more events. The Agreement should also address whether or the shareholders have the to transfer these rights of first refusal.
There as well special rights usually awarded to large venture capitalist investors, for example , right to elect several of the company’s directors and the right to participate in generally of any shares made by the founders of the business (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, the main rights embodied in an Investors’ Rights Agreement are the right to sign up one’s stock with the SEC, proper way to receive information at the company on a consistent basis, and good to purchase stock in any new issuance.