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 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 though 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 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 from your company that they may maintain “true books and records of account” in a system of accounting consistent with accepted accounting systems. The also must covenant that anytime the end of each fiscal year it will furnish each stockholder a balance sheet of the company, revealing the financials of an additional such as gross revenue, losses, profit, and net income. The company will also provide, in advance, an annual budget for every year and a financial report after each fiscal three months.

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 right to purchase a pro rata share of any new offering of equity securities using the company. Which means that the company must provide ample notice to the shareholders for this equity offering, and permit each shareholder a specific quantity of time to exercise as his or her right. Generally, 120 days is since. 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 or even otherwise the shareholders have a right to transfer these rights of first refusal.

There are also special rights usually awarded to large venture capitalist investors, for example , right to elect at least one of the business’ directors as well as the right to sign up in selling of any shares expressed by the founders equity agreement template India Online of the company (a so-called “co-sale” right). Yet generally speaking, the main rights embodied in an Investors’ Rights Agreement always be the right to join one’s stock with the SEC, significance to receive information in the company on the consistent basis, and good to purchase stock any kind of new issuance.