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 way 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 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 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 coming from a company that they can maintain “true books and records of account” within a system of accounting in line with accepted accounting systems. Supplier also must covenant anytime the end of each fiscal year it will furnish every single stockholder an account balance sheet from the company, revealing the financials of an additional such as gross revenue, losses, profit, and salary. The company will also provide, in advance, an annual budget each and every year using a financial report after each fiscal 1 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 authority to purchase an experienced guitarist rata share of any new offering of equity securities together with company. This means that the company must provide ample notice into the shareholders within the equity offering, and permit each shareholder a certain quantity of in order to exercise their specific right. Generally, 120 days is given. If after 120 days the shareholder does not exercise your right, in contrast to the company shall have a choice to sell the stock to other parties. The Agreement should also address whether or the shareholders have a right to transfer these rights of first refusal.
There as well special rights usually awarded to large venture capitalist investors, such as the right to elect some form of of transmit mail directors as well as the right to participate in the sale of any shares completed by the founders of organization (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, the main rights embodied in an Investors’ Rights Agreement are the right to join one’s stock with the SEC, proper way to receive information of the company on the consistent basis, and obtaining to purchase stock in any new issuance.
