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 form 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 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 coming from a company that they may maintain “true books and records of account” within a system of accounting consistent with accepted accounting systems. The also must covenant that anytime the end of each fiscal year it will furnish to each stockholder a balance sheet of the company, revealing the financials of supplier such as gross revenue, losses, profit, and profits. The company will also provide, in advance, an annual budget for everybody year using 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 ability to purchase a professional rata share of any new offering of equity securities by the company. Which means that the company must provide ample notice into the shareholders for this equity offering, and permit each shareholder a specific quantity of a person to exercise their particular 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 the option 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 as well special rights usually awarded to large venture capitalist investors, including right to elect an of the firm’s directors as well as the right to participate in selling of any shares expressed by the founders of supplier (a so-called “co founder agreement sample online India-sale” right). Yet generally speaking, keep in mind rights embodied in an Investors’ Rights Agreement always be right to join up one’s stock with the SEC, the ideal to receive information about the company on a consistent basis, and obtaining to purchase stock any kind of new issuance.