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 company 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 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 your company that they may maintain “true books and records of account” from a system of accounting in line with accepted accounting systems. The also must covenant anytime the end of each fiscal year it will furnish to every stockholder an account 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 together financial report after each fiscal one fourth.
Finally, the investors will almost always want to have a right of first refusal in the Agreement. This means that each major investor shall have the ability to purchase a professional rata share of any new offering of equity securities using the company. Which means that the company must records notice into the shareholders from the equity offering, and permit each shareholder a specific quantity of time to exercise their particular right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise her own right, in contrast to the company shall have selecting 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 an of transmit mail directors and the right to participate in in selling of any shares served 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 always be right to join up one’s stock with the SEC, significance to receive information of the company on a consistent basis, and property to purchase stock in any new issuance.