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 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 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 small business 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 through company that they’ll maintain “true books and records of account” in a system of accounting in step with accepted accounting systems. Supplier also must covenant that after the end of each fiscal year it will furnish each stockholder a balance sheet for the company, revealing the financials of the company such as gross revenue, losses, profit, and cash flow. The company will also provide, in advance, an annual budget for every year having a financial report after each fiscal fraction.

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 ability to purchase a pro rata share of any new offering of equity securities by the company. Which means that the company must provide ample notice into the shareholders from the equity offering, and permit each shareholder a fair bit of time exercise any right. Generally, 120 days is given. If after 120 days the shareholder does not exercise your right, versus the company shall have alternative to sell the stock to more events. 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, for example , right to elect some form of of the business’ directors and also the right to participate in in generally of any shares made by the founders of the company (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, remember rights embodied in an Investors’ Rights Agreement always be the right to join up one’s stock with the SEC, significance to receive information of the company on the consistent basis, and obtaining to purchase stock in any new issuance.