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 though 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 from your company that they’ll maintain “true books and records of account” within a system of accounting consistent with accepted accounting systems. The company also must covenant if the end of each fiscal year it will furnish each stockholder an account balance sheet from the company, revealing the financials of supplier such as gross revenue, losses, profit, and salary. 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 have a right of first refusal in the Agreement. Which means that each major investor shall have the right to purchase a professional rata share of any new offering of equity securities by the company. This means that the company must provide ample notice on the shareholders for this equity offering, and permit each shareholder a certain quantity of in order to exercise as his or her right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise her / his right, versus the company shall have alternative 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 are also special rights usually awarded to large venture capitalist investors, including right to elect one or more of youre able to send directors along with the right to participate in in selling of any shares expressed by the founders of the company (a so-called “co founders agreement india template online-sale” right). Yet generally speaking, view rights embodied in an Investors’ Rights Agreement always be right to join up to one’s stock with the SEC, the right to receive information in the company on the consistent basis, and good to purchase stock any kind of new issuance.