Investors’ Rights Agreements – The 3 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 although 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 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 through company that they can maintain “true books and records of account” from a system of accounting consistent with accepted accounting systems. The also must covenant anytime the end of each fiscal year it will furnish every single stockholder an equilibrium sheet of this company, revealing the financials of an additional such as gross revenue, losses, profit, and net income. The company will also provide, in advance, an annual budget for each year and a financial report after each fiscal quarter.
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 ability to purchase an experienced guitarist rata share of any new offering of equity securities from the company. This means that the company must provide ample notice towards the shareholders from the equity offering, and permit each shareholder a fair bit of time exercise their particular right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise your right, in contrast to the company shall have picking to sell the stock to more events. The Agreement should also address whether or not the shareholders have a right to transfer these rights of first refusal.
There will also special rights usually awarded to large venture capitalist investors, for example , right to elect one or more of the company’s directors and the right to participate in generally of any shares completed by the founders of the company (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, fat burning capacity rights embodied in an Investors’ Rights Agreement would be right to join up one’s stock with the SEC, the right to receive information at the company on a consistent basis, and property to purchase stock in any new issuance.