Investors’ Rights Agreements – 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 involving 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 legal 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 will maintain “true books and records of account” in the system of accounting based on 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 this company, revealing the financials of the such as gross revenue, losses, profit, and cash flow. The company will also provide, in advance, an annual budget for every year and a financial report after each fiscal quarter.
Finally, the investors will almost always want to have a right of first refusal in the Agreement. This means that each major investor shall have the authority to purchase a pro rata share of any new offering of equity securities from the company. Which means that the company must records notice towards shareholders for this equity offering, and permit each shareholder a certain quantity of a person to exercise their specific right. Generally, 120 days is since. If after 120 days the shareholder does not exercise your right, than the company shall have picking 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, including right to elect at least one of the company’s directors along with the right to participate in generally of any shares created by the founders equity agreement template India Online of organization (a so-called “co-sale” right). Yet generally speaking, fat burning capacity rights embodied in an Investors’ Rights Agreement would be right to sign up one’s stock with the SEC, proper way to receive information about the company on the consistent basis, and good to purchase stock any kind of new issuance.
