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 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 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 your company that they will maintain “true books and records of account” in a system of accounting consistent with accepted accounting systems. A lot more claims also must covenant that whenever the end of each fiscal year it will furnish each and every stockholder an equilibrium sheet of the company, revealing the financials of an additional such as gross revenue, losses, profit, and cash flow. The company will also provide, in advance, an annual budget for each year having a financial report after each fiscal one fourth.
Finally, the investors will almost always want to have a right of first refusal in the Agreement. Which means that each major investor shall have the authority to purchase an experienced guitarist rata share of any new offering of equity securities from the company. Which means that the company must provide ample notice towards shareholders from the equity offering, and permit each shareholder a fair bit of in order to exercise any right. Generally, 120 days is handed. If after 120 days the shareholder does not exercise because their right, rrn comparison to the company shall have the option 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 are also special rights usually awarded to large venture capitalist investors, for example , right to elect several of the company’s directors as well as the right to participate in in the sale of any shares made by the founders of the business (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, fat burning capacity rights embodied in an Investors’ Rights Agreement are the right to join up one’s stock with the SEC, the correct to receive information in the company on a consistent basis, and proper to purchase stock in any new issuance.