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 your company that they will maintain “true books and records of account” in a system of accounting based on accepted accounting systems. Corporation also must covenant that after the end of each fiscal year it will furnish each and every stockholder an account balance sheet belonging to the company, revealing the financials of enterprise such as gross revenue, losses, profit, and cash flow. The company will also provide, in advance, an annual budget for every year including a financial report after each fiscal 1 fourth.
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 ability to purchase a professional rata share of any new offering of equity securities from the company. This means that the company must records notice into the shareholders of the equity offering, and permit each shareholder a fair bit of in order to exercise their specific right. Generally, 120 days is since. If after 120 days the shareholder does not exercise her / his right, n comparison to the company shall have the option to sell the stock to other parties. The Agreement should also address whether or not the shareholders have a right to transfer these rights of first refusal.
There furthermore special rights usually awarded to large venture capitalist investors, including right to elect one or more of the firm’s directors as well as the right to participate in the sale of any shares served by the founders of the business (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, fat burning capacity rights embodied in an Investors’ Rights Agreement would be right to join up one’s stock with the SEC, proper way to receive information of the company on the consistent basis, and good to purchase stock in any new issuance.