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 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 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 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 from your company which they will maintain “true books and records of account” in the system of accounting in line with accepted accounting systems. Corporation also must covenant that anytime the end of each fiscal year it will furnish each and every stockholder a balance sheet of this company, revealing the financials of the such as gross revenue, losses, profit, and salary. The company will also provide, in advance, an annual budget each and every year and a financial report after each fiscal quarter.
Finally, the investors will almost always want to secure a right of first refusal in the Agreement. This means that each major investor shall have the authority to purchase an experienced guitarist rata share of any new offering of equity securities from the company. Which means that the company must provide ample notice towards the shareholders within the equity offering, and permit each shareholder a degree of time to exercise his or her right. Generally, 120 days is with. If after 120 days the shareholder does not exercise her / his right, n comparison to the company shall have a choice to sell the stock to more events. The Agreement should also address whether or the shareholders have a right to transfer these rights of first refusal.
There as well special rights usually awarded to large venture capitalist investors, including right to elect at least one of the company’s directors as well as the right to participate in in the sale of any shares served by the founders of supplier (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, fat burning capacity rights embodied in an Investors’ Rights Agreement always be the right to join one’s stock with the SEC, proper way to receive information at the company on a consistent basis, and property to purchase stock in any new issuance.