Investors’ Rights Agreements – The 3 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 kind of securities. Investors’ Rights Agreements can cover several different rights awarded to the investors, depending on the agreement between the two parties. Almost always although 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 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 the company that they’ll maintain “true books and records of account” within a system of accounting in step with accepted accounting systems. Corporation also must covenant that anytime the end of each fiscal year it will furnish every single stockholder an account balance sheet from the company, revealing the financials of the such as gross revenue, losses, profit, and net income. The company will also provide, in advance, an annual budget every year together financial report after each fiscal three months.

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 from the company. Which means that the company must provide ample notice on the shareholders from the equity offering, and permit each shareholder a certain amount of in order to exercise their particular right. Generally, 120 days is given. If after 120 days the shareholder does not exercise her / his right, rrn comparison to the company shall have the option to sell the stock to other parties. The Agreement should also address whether or not the shareholders have the to transfer these rights of first refusal.

There likewise special rights usually awarded to large venture capitalist investors, like the right to elect several of the company’s directors and the right to sign up in selling of any shares created by the founders equity agreement template India Online of organization (a so-called “co-sale” right). Yet generally speaking, remember rights embodied in an Investors’ Rights Agreement the actual right to register one’s stock with the SEC, the correct to receive information at the company on a consistent basis, and obtaining to purchase stock in any new issuance.