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 involving 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 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 via the company that they will maintain “true books and records of account” in a system of accounting in step with accepted accounting systems. The company also must covenant that anytime the end of each fiscal year it will furnish to each stockholder a balance sheet belonging to the company, revealing the financials of enterprise such as gross revenue, losses, profit, and net income. The company will also provide, in advance, an annual budget for every year and 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. This means that each major investor shall have the authority to purchase an expert rata share of any new offering of equity securities together with company. Which means that the company must records notice to the shareholders for the equity offering, and permit each shareholder a certain amount of time to exercise their particular right. Generally, 120 days is handed. If after 120 days the shareholder does not exercise your right, n comparison to the company shall have a choice to sell the stock to more events. The Agreement should also address whether not really the shareholders have a right to transfer these rights of first refusal.
There are also special rights usually awarded to large venture capitalist investors, like the right to elect one or more of the firm’s directors and also the right to sign up in generally of any shares expressed by the founders of supplier (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, the main rights embodied in an Investors’ Rights Agreement the actual right to join up one’s stock with the SEC, significance to receive information about the company on a consistent basis, and proper to purchase stock in any new issuance.