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 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 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 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’ll maintain “true books and records of account” in a system of accounting in keeping with accepted accounting systems. The company also must covenant if the end of each fiscal year it will furnish each stockholder a balance sheet of the company, revealing the financials of the such as gross revenue, losses, profit, and cash flow. The company will also provide, in advance, an annual budget for each year using a financial report after each fiscal one fourth.
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 from the company. This means that the company must records notice on the shareholders from the equity offering, and permit each shareholder a degree of time exercise his or her right. Generally, 120 days is handed. If after 120 days the shareholder does not exercise because their right, than the company shall have alternative to sell the stock to more events. The Agreement should also address whether or even otherwise the shareholders have a right to transfer these rights of first refusal.
There likewise special rights usually awarded to large venture capitalist investors, similar to the right to elect an of the business’ directors as well as the right to sign up in the sale of any shares expressed by the founders equity agreement template India Online of the particular (a so-called “co-sale” right). Yet generally speaking, the main rights embodied in an Investors’ Rights Agreement are the right to join one’s stock with the SEC, significance to receive information for the company on a consistent basis, and proper to purchase stock any kind of new issuance.