An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other way 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 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 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 via the company that they will maintain “true books and records of account” in a system of accounting in keeping with accepted accounting systems. The company also must covenant if the end of each fiscal year it will furnish each stockholder a balance sheet of this company, revealing the financials of supplier such as gross revenue, losses, profit, and salary. The company will also provide, in advance, an annual budget for every year having a financial report after each fiscal quarter.
Finally, the investors will almost always want to secure a right of first refusal in the Agreement. Which means that each major investor shall have the legal right to purchase a pro rata share of any new offering of equity securities together with company. Which means that the company must records notice into the shareholders within the equity offering, and permit each shareholder a certain quantity of in order to exercise any right. Generally, 120 days is given. If after 120 days the shareholder does not exercise your right, than the company shall have picking to sell the stock to more events. The Agreement should also address whether or even otherwise the shareholders have the 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 along with the right to participate in in the sale of any shares served by the founders of organization (a so-called “Co Founder IP Assignement Ageement 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, proper way to receive information at the company on the consistent basis, and property to purchase stock in any new issuance.