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 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 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 professional 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 from the company that they’ll maintain “true books and records of account” within a system of accounting consistent with accepted accounting systems. Corporation also must covenant that whenever the end of each fiscal year it will furnish each stockholder an equilibrium sheet for the company, revealing the financials of enterprise such as gross revenue, losses, profit, and profits. The company will also provide, in advance, an annual budget every year using a financial report after each fiscal quarter.
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 an expert rata share of any new offering of equity securities using the company. This means that the company must provide ample notice to the shareholders within the equity offering, and permit each shareholder a fair bit of a person to exercise their particular right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise your right, versus the company shall have picking to sell the stock to other parties. The Agreement should also address whether or not the shareholders have a right to transfer these rights of first refusal.
There are also special rights usually awarded to large venture capitalist investors, including right to elect an of youre able to send directors along with the right to participate in the sale of any shares created by the founders of the company (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, the main rights embodied in an Investors’ Rights Agreement always be right to sign up one’s stock with the SEC, significance to receive information in the company on the consistent basis, and property to purchase stock any kind of new issuance.
