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 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 though the agreement will cover three basic investors’ rights: Registration rights, Information Rights, and Rights of First Rejection.

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 may maintain “true books and records of account” in a system of accounting consistent with accepted accounting systems. Corporation also must covenant that after the end of each fiscal year it will furnish to each stockholder a balance sheet of the company, revealing the financials of enterprise such as gross revenue, losses, profit, and cash flow. The company will also provide, in advance, an annual budget each and every year together financial report after each fiscal fraction.

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 right to purchase a professional rata share of any new offering of equity securities using the company. This means that the company must provide ample notice towards the shareholders within the equity offering, and permit each shareholder a degree of in order to exercise his or her right. Generally, 120 days is given. If after 120 days the shareholder does not exercise his or her right, n comparison to the company shall have a choice to sell the stock to more events. The Agreement should also address whether not really the shareholders have the to transfer these rights of first refusal.

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