Investors’ Rights Agreements – Several Basic Rights

An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other kind of securities. Investors’ Rights Agreements can cover several different rights awarded to the investors, depending on the agreement between the two parties. Almost always although 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 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 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 the company that they’ll maintain “true books and records of account” within a system of accounting in step with accepted accounting systems. Supplier also must covenant anytime the end of each fiscal year it will furnish each stockholder a balance sheet of 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 for each year and a financial report after each fiscal three months.

Finally, the investors will almost always want to have a right of first refusal in the Agreement. This means that each major investor shall have the authority to purchase an expert rata share of any new offering of equity securities along with company. Which means that the company must records notice towards shareholders within the equity offering, and permit each shareholder a fair bit of time to exercise their particular right. Generally, 120 days is given. If after 120 days the shareholder does not exercise because their right, in contrast to the company shall have alternative to sell the stock to other parties. The Agreement should also address whether or even otherwise the shareholders have a right to transfer these rights of first refusal.

There will also special rights usually awarded to large venture capitalist investors, like the right to elect an of the business’ directors along with the right to participate in selling of any shares made by the founders of organization (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, keep in mind rights embodied in an Investors’ Rights Agreement always be right to join up to one’s stock with the SEC, the right to receive information for the company on a consistent basis, and proper to purchase stock in any new issuance.