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 involving 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 small business 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 authority 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 will maintain “true books and records of account” from a system of accounting consistent with accepted accounting systems. Supplier also must covenant that whenever the end of each fiscal year it will furnish every single stockholder a balance sheet belonging to the company, revealing the financials of an additional such as gross revenue, losses, profit, and monetary. The company will also provide, in advance, an annual budget each and every year including 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. Which means that each major investor shall have the legal right to purchase a professional rata share of any new offering of equity securities together with company. Which means that the company must records notice towards shareholders for this equity offering, and permit each shareholder a degree of time to exercise as his or her right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise his or her right, versus the company shall have alternative to sell the stock to more events. The Agreement should also address whether or the shareholders have the to transfer these rights of first refusal.

There furthermore special rights usually awarded to large venture capitalist investors, such as the right to elect some form of of the company’s directors along with the right to participate in in the sale of any shares made by the founders of organization (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, remember rights embodied in an Investors’ Rights Agreement always be right to sign up one’s stock with the SEC, proper way to receive information of the company on a consistent basis, and proper to purchase stock any kind of new issuance.