Investors’ Rights Agreements – The 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 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 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 company 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 through company that they may maintain “true books and records of account” from a system of accounting in line with accepted accounting systems. The company also must covenant anytime the end of each fiscal year it will furnish to each stockholder an equilibrium sheet of the company, revealing the financials of the company such as gross revenue, losses, profit, and cash flow. The company will also provide, in advance, an annual budget every year having 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 right to purchase a pro rata share of any new offering of equity securities from the company. Which means that the company must records notice into the shareholders within the equity offering, and permit each shareholder a degree of time exercise his or her right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise because their right, in contrast to the company shall have a choice 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, such as the right to elect some form of of the firm’s directors as well as the right to participate in in the sale of any shares completed by the founders of the particular (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, keep in mind rights embodied in an Investors’ Rights Agreement are the right to join up to one’s stock with the SEC, the correct to receive information in the company on a consistent basis, and property to purchase stock in any new issuance.
