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 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 firm’s 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 can maintain “true books and records of account” within a system of accounting in line with accepted accounting systems. Supplier also must covenant that after the end of each fiscal year it will furnish each stockholder an equilibrium sheet of the company, revealing the financials of the such as gross revenue, losses, profit, and net income. The company will also provide, in advance, an annual budget for each year including a 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 legal right to purchase an expert rata share of any new offering of equity securities using the company. This means that the company must records notice on the shareholders for this equity offering, and permit each shareholder a fair bit of time exercise as his or her right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise because their right, than the company shall have selecting 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 will also special rights usually awarded to large venture capitalist investors, such as the right to elect several of transmit mail directors as well as the right to participate in manage of any shares expressed by the founders of the company (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, remember rights embodied in an Investors’ Rights Agreement always be right to join up one’s stock with the SEC, the right to receive information at the company on a consistent basis, and good to purchase stock in any new issuance.