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 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 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 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 from the company which they will maintain “true books and records of account” in the system of accounting based on accepted accounting systems. Supplier also must covenant that after the end of each fiscal year it will furnish to each stockholder a balance sheet belonging to the company, revealing the financials of supplier such as gross revenue, losses, profit, and profits. The company will also provide, in advance, an annual budget for each year using a financial report after each fiscal fraction.

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 an experienced guitarist rata share of any new offering of equity securities from the company. Which means that the company must provide ample notice to the shareholders for this equity offering, and permit each shareholder a certain quantity of in order to exercise as his or her right. Generally, 120 days is given. If after 120 days the shareholder does not exercise her own right, in contrast to the company shall have a choice to sell the stock to other parties. The Agreement should also address whether or even otherwise the shareholders have the to transfer these rights of first refusal.

There will also special rights usually awarded to large venture capitalist investors, such as the right to elect at least one of the business’ directors and also the right to sign up in the sale of any shares expressed by the founders of the business (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 up one’s stock with the SEC, significance to receive information in the company on a consistent basis, and obtaining to purchase stock any kind of new issuance.