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 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 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 coming from a company which they will maintain “true books and records of account” within a system of accounting consistent with accepted accounting systems. The also must covenant that whenever the end of each fiscal year it will furnish each stockholder a balance sheet of this company, revealing the financials of enterprise such as gross revenue, losses, profit, and profits. The company will also provide, in advance, an annual budget for each year together 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 legal right to purchase a pro rata share of any new offering of equity securities together with company. This means that the company must provide ample notice towards the shareholders for this equity offering, and permit each shareholder a certain amount of time to exercise any right. Generally, 120 days is handed. If after 120 days the shareholder does not exercise her / his right, in contrast to the company shall have the option to sell the stock to more events. 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 several of the business’ directors and also the right to participate in in generally of any shares made by the founders of the business (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, view rights embodied in an Investors’ Rights Agreement are the right to register one’s stock with the SEC, proper way to receive information about the company on the consistent basis, and property to purchase stock in any new issuance.