An Investors’ Rights Agreement is a complex legal document outlining the rights and responsibilities of investors when purchasing a company’s stock or other type 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 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 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 from the company that they’ll maintain “true books and records of account” in the system of accounting based on accepted accounting systems. Corporation also must covenant that anytime the end of each fiscal year it will furnish each stockholder a balance sheet belonging to the company, revealing the financials of the company such as gross revenue, losses, profit, and salary. The company will also provide, in advance, an annual budget for everybody year and a financial report after each fiscal 1 fourth.
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 a pro rata share of any new offering of equity securities together with company. Which means that the company must provide ample notice towards shareholders of the equity offering, and permit each shareholder a fair bit of a person to exercise their particular 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 the shareholders have a right to transfer these rights of first refusal.
There are also special rights usually awarded to large venture capitalist investors, including right to elect an of the firm’s directors along with the right to sign up in the sale of any shares expressed 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 register one’s stock with the SEC, the right to receive information in the company on a consistent basis, and obtaining to purchase stock any kind of new issuance.