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 kind 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 professional 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 from the company that they’ll maintain “true books and records of account” in the system of accounting in line with accepted accounting systems. A lot more claims also must covenant that after the end of each fiscal year it will furnish every single stockholder an account balance sheet for the company, revealing the financials of the such as gross revenue, losses, profit, and profits. The company will also provide, in advance, an annual budget every year and a financial report after each fiscal three months.

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 legal right to purchase an expert rata share of any new offering of equity securities using the company. This means that the company must records notice towards the shareholders for this equity offering, and permit each shareholder a fair bit of time to exercise their particular right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise his or her right, rrn comparison 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 a right to transfer these rights of first refusal.

There will also special rights usually awarded to large venture capitalist investors, including right to elect an of the company’s directors and the right to sign up in manage of any shares completed 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 would be right to join up to one’s stock with the SEC, significance to receive information of the company on a consistent basis, and proper to purchase stock in any new issuance.