Investors’ Rights Agreements – The 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 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 company 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 your company that they can maintain “true books and records of account” in the system of accounting in line with accepted accounting systems. The also must covenant anytime the end of each fiscal year it will furnish each and every stockholder an equilibrium sheet for the company, revealing the financials of an additional such as gross revenue, losses, profit, and monetary. The company will also provide, in advance, an annual budget for every year together financial report after each fiscal fraction.

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 authority to purchase a professional rata share of any new offering of equity securities from the company. This means that the company must records notice to the shareholders of the equity offering, and permit each shareholder a fair bit of time 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 selecting to sell the stock to other parties. The Agreement should also address whether or not the shareholders have a right to transfer these rights of first refusal.

There will also special rights usually awarded to large venture capitalist investors, similar to the right to elect several of transmit mail directors along with the right to sign up in generally of any shares expressed by the founders of organization (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, remember rights embodied in an Investors’ Rights Agreement always be right to join up one’s stock with the SEC, the correct to receive information about the company on a consistent basis, and the right to purchase stock any kind of new issuance.