Investors’ Rights Agreements – Three Basic Rights

Investors’ Rights Agreements – Three 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 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 professional 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 from your company that they can maintain “true books and records of account” in the system of accounting based on accepted accounting systems. The company also must covenant anytime the end of each fiscal year it will furnish to every stockholder an account balance sheet of this company, revealing the financials of enterprise such as gross revenue, losses, profit, and net income. The company will also provide, in advance, an annual budget for every year having a financial report after each fiscal three months.

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 ability to purchase an expert rata share of any new offering of equity securities together with company. This means that the company must records notice towards shareholders for the equity offering, and permit each shareholder a fair bit of in order to exercise any right. Generally, 120 days is with. If after 120 days the shareholder does not exercise her own right, in contrast to the company shall have picking to sell the stock to more events. The Agreement should also address whether or not the shareholders have the to transfer these rights of first refusal.

There are also special rights usually awarded to large venture capitalist investors, like the right to elect several of the firm’s directors and also the right to sign up in manage of any shares completed by the founders of the business (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, the main rights embodied in an Investors’ Rights Agreement always be the right to join up one’s stock with the SEC, the correct to receive information in the company on the consistent basis, and proper to purchase stock in any new issuance.