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 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 via the company that they will maintain “true books and records of account” in a system of accounting in line with accepted accounting systems. The company also must covenant that anytime the end of each fiscal year it will furnish each stockholder an equilibrium sheet for the company, revealing the financials of the company such as gross revenue, losses, profit, and net income. The company will also provide, in advance, an annual budget for everybody year having a financial report after each fiscal fraction.
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 legal right to purchase a professional rata share of any new offering of equity securities together with company. Which means that the company must records notice to the shareholders of the equity offering, and permit each shareholder a certain amount of time to exercise their specific right. Generally, 120 days is with. If after 120 days the shareholder does not exercise her own right, than the company shall have the option to sell the stock to other parties. The Agreement should also address whether or even otherwise the shareholders have a right to transfer these rights of first refusal.
There will also special rights usually awarded to large venture capitalist investors, for example , right to elect at least one of the business’ directors and the right to sign up in selling of any shares completed by the founders equity agreement template India Online of the business (a so-called “co-sale” right). Yet generally speaking, the main rights embodied in an Investors’ Rights Agreement always be the right to sign up one’s stock with the SEC, proper way to receive information for the company on the consistent basis, and the right to purchase stock any kind of new issuance.