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 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 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 ability 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” from a system of accounting based on accepted accounting systems. The also must covenant that anytime the end of each fiscal year it will furnish every single stockholder a balance sheet of this company, revealing the financials of the such as gross revenue, losses, profit, and cash flow. The company will also provide, in advance, an annual budget every year together financial report after each fiscal one fourth.
Finally, the investors will almost always want to secure a right of first refusal in the Agreement. This means that each major investor shall have the ability to purchase a pro rata share of any new offering of equity securities together with company. Which means that the company must provide ample notice on the shareholders for this equity offering, and permit each shareholder a degree of in order to exercise his or her right. Generally, 120 days is given. If after 120 days the shareholder does not exercise your right, than the company shall have alternative 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 as well special rights usually awarded to large venture capitalist investors, like the right to elect an of transmit mail directors along with the right to sign up in manage of any shares made by the founders of organization (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, remember rights embodied in an Investors’ Rights Agreement always be the right to register one’s stock with the SEC, significance to receive information at the company on the consistent basis, and the right to purchase stock in any new issuance.
