An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other kind 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 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 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 ability 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 may maintain “true books and records of account” in the system of accounting based on accepted accounting systems. The company also must covenant if the end of each fiscal year it will furnish to each stockholder an account balance sheet of this company, revealing the financials of supplier such as gross revenue, losses, profit, and salary. The company will also provide, in advance, an annual budget for everybody year using a financial report after each fiscal one fourth.
Finally, the investors will almost always want to secure a right of first refusal in the Agreement. This means that each major investor shall have the right to purchase an experienced guitarist rata share of any new offering of equity securities from the company. This means that the company must provide ample notice towards shareholders from the equity offering, and permit each shareholder a degree of with regard to you exercise their specific right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise her own right, than the company shall have a choice to sell the stock to other parties. The Agreement should also address whether or not the shareholders have the to transfer these rights of first refusal.
There furthermore special rights usually awarded to large venture capitalist investors, such as the right to elect several of the firm’s directors and also the right to participate in manage of any shares expressed by the founders of organization (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, view rights embodied in an Investors’ Rights Agreement would be right to join one’s stock with the SEC, the correct to receive information for the company on the consistent basis, and the right to purchase stock any kind of new issuance.