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 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 company 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 through company that they can maintain “true books and records of account” in the system of accounting consistent with accepted accounting systems. A lot more claims also must covenant anytime the end of each fiscal year it will furnish each stockholder an account balance sheet belonging to the company, revealing the financials of the company such as gross revenue, losses, profit, and cash flow. The company will also provide, in advance, an annual budget each and every year having a financial report after each fiscal fraction.
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 authority to purchase a pro rata share of any new offering of equity securities from the company. Which means that the company must provide ample notice into the shareholders within the equity offering, and permit each shareholder a specific quantity of time exercise their specific right. Generally, 120 days is with. If after 120 days the shareholder does not exercise because their right, versus the company shall have alternative 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 are also special rights usually awarded to large venture capitalist investors, such as the right to elect some form of of the business’ directors as well as the right to participate in in selling of any shares created by the founders of the company (a so-called “co founder agreement sample online India-sale” right). Yet generally speaking, the main rights embodied in an Investors’ Rights Agreement always be right to join one’s stock with the SEC, the right to receive information of the company on the consistent basis, and obtaining to purchase stock in any new issuance.