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 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 coming from a company that they can maintain “true books and records of account” in the system of accounting in step with accepted accounting systems. The company also must covenant if the end of each fiscal year it will furnish every single stockholder an account balance sheet belonging to the company, revealing the financials of supplier such as gross revenue, losses, profit, and net income. The company will also provide, in advance, an annual budget for each year using 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. Which means that each major investor shall have the legal right to purchase a pro rata share of any new offering of equity securities together with company. This means that the company must provide ample notice into the shareholders for the equity offering, and permit each shareholder a certain quantity of time exercise his or her right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise her / his right, than the company shall have the option to sell the stock to more events. The Agreement should also address whether not really the shareholders have the to transfer these rights of first refusal.
There furthermore special rights usually awarded to large venture capitalist investors, including right to elect at least one of the firm’s directors and the right to sign up in selling of any shares expressed by the founders of supplier (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, view rights embodied in an Investors’ Rights Agreement are the right to join up to one’s stock with the SEC, proper way to receive information of the company on a consistent basis, and good to purchase stock in any new issuance.