Investors’ Rights Agreements – 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 small business 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 through company that they may maintain “true books and records of account” from a system of accounting based on accepted accounting systems. Supplier also must covenant that whenever the end of each fiscal year it will furnish to every stockholder an account balance sheet for the company, revealing the financials of enterprise such as gross revenue, losses, profit, and profits. The company will also provide, in advance, an annual budget for each year having a financial report after each fiscal one fourth.

Finally, the investors will almost always want to have a right of first refusal in the Agreement. This means that each major investor shall have the right to purchase a professional rata share of any new offering of equity securities along with company. Which means that the company must records notice towards shareholders from the equity offering, and permit each shareholder a specific quantity of with regard to you exercise their particular right. Generally, 120 days is handed. If after 120 days the shareholder does not exercise his or her right, rrn comparison to the company shall have selecting to sell the stock to more events. The Agreement should also address whether or the shareholders have the to transfer these rights of first refusal.

There are also special rights usually awarded to large venture capitalist investors, including right to elect several of youre able to send directors and the right to sign up in generally of any shares served by the founders equity agreement template India Online of the company (a so-called “co-sale” right). Yet generally speaking, keep in mind rights embodied in an Investors’ Rights Agreement the actual right to join up to one’s stock with the SEC, the correct to receive information in the company on the consistent basis, and proper to purchase stock any kind of new issuance.