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 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 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 from your company that they will maintain “true books and records of account” in the system of accounting consistent with accepted accounting systems. Supplier also must covenant anytime the end of each fiscal year it will furnish to every stockholder an equilibrium sheet of the 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 for everybody year including a financial report after each fiscal 1 fourth.

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 pro rata share of any new offering of equity securities together with company. Which means that the company must records notice towards the shareholders for the equity offering, and permit each shareholder a specific quantity of with regard to you exercise their specific right. Generally, 120 days is given. If after 120 days the shareholder does not exercise because their right, versus 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 are also special rights usually awarded to large venture capitalist investors, including right to elect at least one of the firm’s directors along with the right to participate in in manage of any shares made by the founders of the particular (a so-called “co founder agreement sample online India-sale” right). Yet generally speaking, fat burning capacity rights embodied in an Investors’ Rights Agreement are the right to sign up one’s stock with the SEC, the right to receive information of the company on a consistent basis, and property to purchase stock any kind of new issuance.