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 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 professional 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 from the company that they may maintain “true books and records of account” from a system of accounting in keeping with accepted accounting systems. The also must covenant that after the end of each fiscal year it will furnish each and every stockholder an account balance sheet for the company, revealing the financials of enterprise such as gross revenue, losses, profit, and monetary. The company will also provide, in advance, an annual budget for every year using 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. This means that each major investor shall have the ability to purchase a pro rata share of any new offering of equity securities using the company. Which means that the company must records notice towards the shareholders within the equity offering, and permit each shareholder a certain quantity of time exercise their specific right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise his or her right, in contrast to the company shall have alternative to sell the stock to more events. The Agreement should also address whether or not the shareholders have a right to transfer these rights of first refusal.
There as well special rights usually awarded to large venture capitalist investors, like the right to elect several of the business’ directors and the right to participate in the sale of any shares served by the founders of the company (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, fat burning capacity rights embodied in an Investors’ Rights Agreement are the right to register one’s stock with the SEC, the right to receive information for the company on the consistent basis, and obtaining to purchase stock in any new issuance.