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 although 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 the company that they can maintain “true books and records of account” in a system of accounting consistent with accepted accounting systems. Supplier also must covenant that after the end of each fiscal year it will furnish to each stockholder a balance sheet for the company, revealing the financials of supplier such as gross revenue, losses, profit, and net income. The company will also provide, in advance, an annual budget each and every year including a financial report after each fiscal quarter.
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 by the company. Which means that the company must records notice to the shareholders for this equity offering, and permit each shareholder a degree of with regard to you exercise their specific right. Generally, 120 days is since. If after 120 days the shareholder does not exercise her own right, versus the company shall have picking to sell the stock to more events. The Agreement should also address whether or the shareholders have a right to transfer these rights of first refusal.
There likewise special rights usually awarded to large venture capitalist investors, similar to the right to elect at least one of the business’ directors as well as the right to participate in generally of any shares completed by the founders of supplier (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, view rights embodied in an Investors’ Rights Agreement always be right to register one’s stock with the SEC, the correct to receive information in the company on the consistent basis, and good to purchase stock in any new issuance.