An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other involving 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 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 through company that they may maintain “true books and records of account” within a system of accounting consistent with accepted accounting systems. The company also must covenant if the end of each fiscal year it will furnish to each stockholder a balance sheet belonging to the company, revealing the financials of enterprise such as gross revenue, losses, profit, and net income. The company will also provide, in advance, an annual budget each and every year having a financial report after each fiscal fraction.
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 an expert rata share of any new offering of equity securities along with company. This means that the company must records notice into the shareholders for this equity offering, and permit each shareholder a degree of in order to exercise their particular right. Generally, 120 days is with. If after 120 days the shareholder does not exercise her own right, than the company shall have picking 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 are also special rights usually awarded to large venture capitalist investors, similar to the right to elect some form of of youre able to send directors along with the right to participate in in the sale of any shares completed by the founders of the particular (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, fat burning capacity rights embodied in an Investors’ Rights Agreement always be the right to sign up one’s stock with the SEC, proper way to receive information in the company on the consistent basis, and the right to purchase stock any kind of new issuance.