Investors’ Rights Agreements – Several 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 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 from the company that they will maintain “true books and records of account” in a system of accounting in line with accepted accounting systems. A lot more claims also must covenant that after the end of each fiscal year it will furnish each and every stockholder an equilibrium sheet for 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 every year together financial report after each fiscal three months.

Finally, the investors will almost always want to have 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 along with company. This means that the company must provide ample notice on the shareholders for this equity offering, and permit each shareholder a fair bit of time to exercise their particular right. Generally, 120 days is since. If after 120 days the shareholder does not exercise your right, than 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 will also special rights usually awarded to large venture capitalist investors, such as the right to elect at least one of the firm’s directors as well as the right to participate in selling of any shares expressed by the founders of the business (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, view rights embodied in an Investors’ Rights Agreement always be the right to join up one’s stock with the SEC, proper way to receive information in the company on the consistent basis, and good to purchase stock any kind of new issuance.