Investors’ Rights Agreements – A number of 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 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 the company which they will maintain “true books and records of account” in the system of accounting consistent with accepted accounting systems. The company also must covenant that whenever the end of each fiscal year it will furnish to each stockholder an equilibrium sheet from the company, revealing the financials of enterprise such as gross revenue, losses, profit, and cash flow. The company will also provide, in advance, an annual budget for everybody year having a financial report after each fiscal one fourth.
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 along with company. Which means that the company must records notice towards shareholders for this equity offering, and permit each shareholder a certain quantity of time to exercise any right. Generally, 120 days is since. If after 120 days the shareholder does not exercise her / his right, in contrast to the company shall have selecting to sell the stock to other parties. The Agreement should also address whether or not the shareholders have the to transfer these rights of first refusal.
There are also special rights usually awarded to large venture capitalist investors, such as the right to elect an of the firm’s directors and also the right to sign up in manage of any shares created by the founders of organization (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, view rights embodied in an Investors’ Rights Agreement are the right to join one’s stock with the SEC, the right to receive information at the company on the consistent basis, and property to purchase stock in any new issuance.
