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 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 although 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 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 ability 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” in the system of accounting in keeping with accepted accounting systems. A lot more claims also must covenant that after the end of each fiscal year it will furnish each and every stockholder an account balance sheet from the company, revealing the financials of the company such as gross revenue, losses, profit, and profits. The company will also provide, in advance, an annual budget each and every year having a financial report after each fiscal 1 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 legal right to purchase a pro rata share of any new offering of equity securities together with company. This means that the company must provide ample notice towards shareholders for the equity offering, and permit each shareholder a fair bit of time to exercise any right. Generally, 120 days is since. If after 120 days the shareholder does not exercise his or her right, than the company shall have picking to sell the stock to other parties. The Agreement should also address whether not really the shareholders have the to transfer these rights of first refusal.

There will also special rights usually awarded to large venture capitalist investors, like the right to elect one or more of the firm’s directors along with the right to participate in generally of any shares served by the founders of the company (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, the main rights embodied in an Investors’ Rights Agreement are the right to join up to one’s stock with the SEC, proper way to receive information for the company on a consistent basis, and proper to purchase stock in any new issuance.

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