An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other form 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 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 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 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 coming from a company that they may maintain “true books and records of account” in a system of accounting in keeping with accepted accounting systems. Corporation also must covenant that after the end of each fiscal year it will furnish every single stockholder a balance sheet belonging to the company, revealing the financials of the company such as gross revenue, losses, profit, and net income. The company will also provide, in advance, an annual budget for each 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. Which means that each major investor shall have the right to purchase an experienced guitarist rata share of any new offering of equity securities by the company. Which means that the company must provide ample notice on the shareholders for the equity offering, and permit each shareholder a degree of time to exercise his or her right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise because their right, n comparison to the company shall have alternative to sell the stock to other parties. The Agreement should also address whether or the shareholders have a right to transfer these rights of first refusal.
There will also special rights usually awarded to large venture capitalist investors, including right to elect one or more of the company’s directors and also the right to participate in in generally of any shares made by the founders of the business (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 sign up one’s stock with the SEC, the correct to receive information for the company on a consistent basis, and good to purchase stock in any new issuance.