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 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 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 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 through company that they’ll maintain “true books and records of account” in a system of accounting in step with accepted accounting systems. The also must covenant that anytime the end of each fiscal year it will furnish to each stockholder an account balance sheet from the company, revealing the financials of enterprise such as gross revenue, losses, profit, and monetary. The company will also provide, in advance, an annual budget for each year including a financial report after each fiscal one fourth.
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 pro rata share of any new offering of equity securities together with company. This means that the company must provide ample notice towards the shareholders for the equity offering, and permit each shareholder a certain quantity of in order to exercise as his or her right. Generally, 120 days is with. If after 120 days the shareholder does not exercise his or her right, rrn comparison 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 will also special rights usually awarded to large venture capitalist investors, such as the right to elect some form of of the company’s directors along with the right to sign up in the sale of any shares created by the founders of organization (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, fat burning capacity rights embodied in an Investors’ Rights Agreement always be right to sign up one’s stock with the SEC, the correct to receive information of the company on a consistent basis, and good to purchase stock any kind of new issuance.
