Investors’ Rights Agreements – The 3 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 way 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 ability 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 through company that they may maintain “true books and records of account” in the system of accounting in step with accepted accounting systems. Supplier also must covenant that after the end of each fiscal year it will furnish each and every stockholder an account balance sheet for the company, revealing the financials of an additional such as gross revenue, losses, profit, and monetary. The company will also provide, in advance, an annual budget for each year using a financial report after each fiscal one fourth.
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 a pro rata share of any new offering of equity securities by the company. Which means that the company must provide ample notice on the shareholders from the equity offering, and permit each shareholder a certain amount of time to exercise their specific right. Generally, 120 days is since. If after 120 days the shareholder does not exercise her own right, versus the company shall have picking to sell the stock to more events. The Agreement should also address whether or not the shareholders have a right to transfer these rights of first refusal.
There likewise special rights usually awarded to large venture capitalist investors, including right to elect at least one of the company’s directors and the right to participate in selling 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 always be right to join one’s stock with the SEC, the right to receive information about the company on a consistent basis, and good to purchase stock any kind of new issuance.
