An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other type 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 authority 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 via the company that they may maintain “true books and records of account” within a system of accounting consistent with accepted accounting systems. The also must covenant that anytime the end of each fiscal year it will furnish to each stockholder an equilibrium sheet from 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 everybody year having a financial report after each fiscal three months.
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 right to purchase a pro rata share of any new offering of equity securities using the company. This means that the company must records notice into the shareholders within the equity offering, and permit each shareholder a degree of with regard to you exercise his or her right. Generally, 120 days is given. If after 120 days the shareholder does not exercise because their right, versus the company shall have picking to sell the stock to other parties. 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, including right to elect some form of of transmit mail directors and also the right to participate in manage of any shares served by the founders of the business (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, remember rights embodied in an Investors’ Rights Agreement always be the right to join one’s stock with the SEC, significance to receive information about the company on a consistent basis, and good to purchase stock any kind of new issuance.