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 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 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 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 which they will maintain “true books and records of account” from a system of accounting in line with accepted accounting systems. The company also must covenant if the end of each fiscal year it will furnish each and every stockholder an equilibrium sheet of 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 including a financial report after each fiscal quarter.

Finally, the investors will almost always want to secure a right of first refusal in the Agreement. Which means that each major investor shall have the legal right to purchase a professional rata share of any new offering of equity securities using the company. Which means that the company must provide ample notice into the shareholders for the equity offering, and permit each shareholder a certain amount of time exercise any right. Generally, 120 days is given. If after 120 days the shareholder does not exercise her own right, rrn comparison to the company shall have selecting to sell the stock to more events. The Agreement should also address whether or even otherwise the shareholders have the to transfer these rights of first refusal.

There likewise special rights usually awarded to large venture capitalist investors, such as the right to elect several of transmit mail directors along with the right to participate in selling of any shares expressed by the founders of the particular (a so-called “co founder agreement sample online India-sale” right). Yet generally speaking, remember rights embodied in an Investors’ Rights Agreement always be right to join one’s stock with the SEC, significance to receive information at the company on the consistent basis, and good to purchase stock any kind of new issuance.