An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other involving 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 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 via 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 if the end of each fiscal year it will furnish to every stockholder a balance sheet for the company, revealing the financials of enterprise such as gross revenue, losses, profit, and salary. The company will also provide, in advance, an annual budget for each year including a financial report after each fiscal three months.
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 ability to purchase an experienced guitarist rata share of any new offering of equity securities along with company. Which means that the company must records notice into the shareholders for the equity offering, and permit each shareholder a certain amount of a person to exercise his or her right. Generally, 120 days is handed. If after 120 days the shareholder does not exercise her / his right, than the company shall have a choice to sell the stock to more events. The Agreement should also address whether not really the shareholders have the to transfer these rights of first refusal.
There will also special rights usually awarded to large venture capitalist investors, similar to the right to elect several of the company’s directors as well as the right to participate in selling of any shares created by the founders of the company (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, the main rights embodied in an Investors’ Rights Agreement would be right to join one’s stock with the SEC, significance to receive information of the company on the consistent basis, and proper to purchase stock any kind of new issuance.