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 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 through company which they will maintain “true books and records of account” from a system of accounting in line with accepted accounting systems. The also must covenant that whenever the end of each fiscal year it will furnish every single stockholder an equilibrium sheet from the company, revealing the financials of supplier such as gross revenue, losses, profit, and monetary. The company will also provide, in advance, an annual budget each and every year together financial report after each fiscal quarter.
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 an experienced guitarist rata share of any new offering of equity securities along with company. This means that the company must records notice towards the shareholders within the equity offering, and permit each shareholder a degree of in order to exercise his or her right. Generally, 120 days is given. If after 120 days the shareholder does not exercise her / his right, than the company shall have alternative to sell the stock to more events. The Agreement should also address whether or even otherwise the shareholders have the to transfer these rights of first refusal.
There are also special rights usually awarded to large venture capitalist investors, like the right to elect an of the firm’s directors and the right to sign up in selling of any shares served by the founders of the company (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, keep in mind rights embodied in an Investors’ Rights Agreement the actual right to register one’s stock with the SEC, the ideal to receive information at the company on the consistent basis, and obtaining to purchase stock any kind of new issuance.