Investors’ Rights Agreements – The 3 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 kind 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 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 may maintain “true books and records of account” in the system of accounting in step with accepted accounting systems. A lot more claims also must covenant that anytime the end of each fiscal year it will furnish each stockholder an account balance sheet from the company, revealing the financials of an additional such as gross revenue, losses, profit, and profits. The company will also provide, in advance, an annual budget each and every 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. This means that each major investor shall have the authority to purchase an experienced guitarist rata share of any new offering of equity securities using the company. This means that the company must provide ample notice into the shareholders within the equity offering, and permit each shareholder a certain quantity of a person to exercise their specific right. Generally, 120 days is with. If after 120 days the shareholder does not exercise his or her right, versus the company shall have alternative to sell the stock to other parties. The Agreement should also address whether or the shareholders have a right to transfer these rights of first refusal.
There furthermore special rights usually awarded to large venture capitalist investors, including right to elect one or more of youre able to send directors and also the right to participate in in selling of any shares created by the founders of the particular (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, keep in mind rights embodied in an Investors’ Rights Agreement would be right to join up one’s stock with the SEC, the right to receive information for the company on the consistent basis, and the right to purchase stock in any new issuance.
