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 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 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 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” within a system of accounting consistent with accepted accounting systems. A lot more claims also must covenant anytime the end of each fiscal year it will furnish each stockholder an account balance sheet belonging to the company, revealing the financials of the such as gross revenue, losses, profit, and profits. The company will also provide, in advance, an annual budget for each year having a financial report after each fiscal quarter.

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 right to purchase a pro rata share of any new offering of equity securities from the company. This means that the company must records notice towards the shareholders for this equity offering, and permit each shareholder a specific quantity of time exercise as his or her right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise your right, rrn comparison to the company shall have a choice 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, for example , right to elect at least one of youre able to send directors along with the right to participate in the sale of any shares made by the founders of supplier (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, keep in mind rights embodied in an Investors’ Rights Agreement would be right to sign up one’s stock with the SEC, the ideal to receive information at the company on a consistent basis, and property to purchase stock any kind of new issuance.