Investors’ Rights Agreements – Several 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 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 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 coming from a company that they can maintain “true books and records of account” in the system of accounting in line with accepted accounting systems. The company also must covenant that anytime the end of each fiscal year it will furnish each stockholder an equilibrium sheet from the company, revealing the financials of the company such as gross revenue, losses, profit, and net income. The company will also provide, in advance, an annual budget for each year using a financial report after each fiscal quarter.

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 authority to purchase an expert rata share of any new offering of equity securities by the company. Which means that the company must records notice to the shareholders for this equity offering, and permit each shareholder a certain quantity of with regard to you exercise their particular right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise her / his right, than the company shall have a choice to sell the stock to other parties. The Agreement should also address whether not really the shareholders have the to transfer these rights of first refusal.

There are also special rights usually awarded to large venture capitalist investors, such as the right to elect at least one of the company’s directors as well as the right to participate in in manage of any shares made by the founders of the business (a so-called “Co Founder IP Assignement Ageement India-sale” right). Yet generally speaking, remember rights embodied in an Investors’ Rights Agreement would be right to join up to one’s stock with the SEC, the right to receive information in the company on the consistent basis, and proper to purchase stock in any new issuance.