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 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 legal 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 from the company that they can maintain “true books and records of account” within a system of accounting in line with accepted accounting systems. The also must covenant anytime the end of each fiscal year it will furnish each and every stockholder an equilibrium sheet for 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 for every year including a financial report after each fiscal 1 fourth.
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 legal right to purchase an expert rata share of any new offering of equity securities from the company. Which means that the company must provide ample notice into the shareholders within the equity offering, and permit each shareholder a degree of in order to exercise any right. Generally, 120 days is since. If after 120 days the shareholder does not exercise his or her right, versus the company shall have the option to sell the stock to other parties. The Agreement should also address whether or not the shareholders have a right to transfer these rights of first refusal.
There furthermore special rights usually awarded to large venture capitalist investors, for example , right to elect some form of of the business’ directors and the right to sign up in manage of any shares completed by the founders of supplier (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, the main rights embodied in an Investors’ Rights Agreement always be right to join up to one’s stock with the SEC, significance to receive information of the company on a consistent basis, and obtaining to purchase stock any kind of new issuance.