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 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 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 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 which they will maintain “true books and records of account” in the system of accounting in keeping with accepted accounting systems. The also must covenant if the end of each fiscal year it will furnish to every stockholder a balance sheet of the company, revealing the financials of the company such as gross revenue, losses, profit, and net income. The company will also provide, in advance, an annual budget for everybody year together 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 authority to purchase a professional rata share of any new offering of equity securities using the company. This means that the company must records notice towards shareholders for this equity offering, and permit each shareholder a certain amount of with regard to you exercise their specific right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise his or her right, in contrast to the company shall have alternative to sell the stock to other parties. 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 the company’s directors as well as the right to sign up in the sale of any shares created by the founders of organization (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, fat burning capacity rights embodied in an Investors’ Rights Agreement would be right to sign up one’s stock with the SEC, the right to receive information in the company on a consistent basis, and the right to purchase stock in any new issuance.

Bookmark the permalink.