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 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 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 via the company that they may maintain “true books and records of account” in a system of accounting in keeping with accepted accounting systems. A lot more claims also must covenant that whenever the end of each fiscal year it will furnish every single stockholder a balance sheet of the company, revealing the financials of enterprise such as gross revenue, losses, profit, and cash flow. The company will also provide, in advance, an annual budget every year using a financial report after each fiscal three months.
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 a pro rata share of any new offering of equity securities along with company. This means that the company must records notice towards shareholders of the equity offering, and permit each shareholder a specific quantity of with regard to you exercise their particular right. Generally, 120 days is given. If after 120 days the shareholder does not exercise because their right, than the company shall have alternative to sell the stock to more events. The Agreement should also address whether or even otherwise the shareholders have a right to transfer these rights of first refusal.
There will also special rights usually awarded to large venture capitalist investors, like the right to elect some form of of the business’ directors and also the right to participate in generally of any shares created by the founders of the business (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, remember rights embodied in an Investors’ Rights Agreement always be right to join one’s stock with the SEC, the correct to receive information about the company on a consistent basis, and good to purchase stock any kind of new issuance.