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 though 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 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 via the company that they may maintain “true books and records of account” from a system of accounting based on accepted accounting systems. Corporation also must covenant that anytime the end of each fiscal year it will furnish each stockholder a balance sheet from the company, revealing the financials of the company such as gross revenue, losses, profit, and salary. The company will also provide, in advance, an annual budget for each year and a financial report after each fiscal three months.
Finally, the investors will almost always want to have a right of first refusal in the Agreement. This means that each major investor shall have the authority to purchase a pro rata share of any new offering of equity securities from the company. This means that the company must provide ample notice into the shareholders from the equity offering, and permit each shareholder a certain amount of a person to exercise any right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise her / his right, in contrast to the company shall have a choice to sell the stock to more events. The Agreement should also address whether or even otherwise the shareholders have a right to transfer these rights of first refusal.
There as well special rights usually awarded to large venture capitalist investors, like the right to elect one or more of youre able to send directors and the right to participate in in manage of any shares made by the founders of organization (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, the main rights embodied in an Investors’ Rights Agreement are the right to join one’s stock with the SEC, proper way to receive information about the company on a consistent basis, and good to purchase stock in any new issuance.