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 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 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 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 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 will maintain “true books and records of account” within a system of accounting based on accepted accounting systems. A lot more claims also must covenant if the end of each fiscal year it will furnish each and every stockholder a balance sheet of this company, revealing the financials of enterprise such as gross revenue, losses, profit, and salary. The company will also provide, in advance, an annual budget for every year having a financial report after each fiscal three months.

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 right to purchase a pro rata share of any new offering of equity securities using the company. This means that the company must records notice into the shareholders within the equity offering, and permit each shareholder a fair bit of a person to exercise their specific right. Generally, 120 days is handed. If after 120 days the shareholder does not exercise her / his right, rrn comparison to the company shall have the option 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 likewise special rights usually awarded to large venture capitalist investors, such as the right to elect several of the company’s directors along with the right to participate in manage of any shares created by the founders of organization (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, remember rights embodied in an Investors’ Rights Agreement the actual right to join 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.