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 type 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 professional 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 will maintain “true books and records of account” in the system of accounting consistent with accepted accounting systems. The also must covenant that after the end of each fiscal year it will furnish each and every stockholder an equilibrium sheet of this company, revealing the financials of enterprise such as gross revenue, losses, profit, and monetary. The company will also provide, in advance, an annual budget each and every year and 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. This means that each major investor shall have the authority to purchase an expert rata share of any new offering of equity securities together with company. This means that the company must records notice towards the shareholders for this equity offering, and permit each shareholder a degree of in order to exercise his or her right. Generally, 120 days is given. If after 120 days the shareholder does not exercise her / his right, versus the company shall have picking 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 as well special rights usually awarded to large venture capitalist investors, similar to the right to elect one or more of the company’s directors and the right to participate in in generally of any shares made by the founders equity agreement template India Online of the particular (a so-called “co-sale” right). Yet generally speaking, remember rights embodied in an Investors’ Rights Agreement would be right to join one’s stock with the SEC, the right to receive information of the company on a consistent basis, and the right to purchase stock any kind of new issuance.