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 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 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” within a system of accounting in line with accepted accounting systems. The also must covenant that after the end of each fiscal year it will furnish to every stockholder an equilibrium sheet for the company, revealing the financials of the company such as gross revenue, losses, profit, and profits. The company will also provide, in advance, an annual budget each and every year using 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 authority 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 to the shareholders within the equity offering, and permit each shareholder a certain amount of a person to exercise any right. Generally, 120 days is given. If after 120 days the shareholder does not exercise his or her right, rrn comparison 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 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 at least one of transmit mail directors and the right to participate in generally of any shares completed by the founders of the company (a so-called “co founders agreement india template online-sale” right). Yet generally speaking, the main rights embodied in an Investors’ Rights Agreement would be right to join one’s stock with the SEC, the ideal to receive information for the company on a consistent basis, and the right to purchase stock in any new issuance.