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 firm’s 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 the company that they can maintain “true books and records of account” in the system of accounting in line with accepted accounting systems. The also must covenant that whenever the end of each fiscal year it will furnish each stockholder a balance sheet of the company, revealing the financials of the company such as gross revenue, losses, profit, and monetary. The company will also provide, in advance, an annual budget for everybody year and a financial report after each fiscal quarter.

Finally, the investors will almost always want to have a right of first refusal in the Agreement. Which means that each major investor shall have the ability to purchase a pro rata share of any new offering of equity securities by the company. This means that the company must provide ample notice towards the shareholders from the equity offering, and permit each shareholder a certain amount of a person to exercise their particular right. Generally, 120 days is extended. If after 120 days the shareholder does not exercise her own right, than the company shall have a choice 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 will also special rights usually awarded to large venture capitalist investors, like the right to elect an of the firm’s directors and the right to participate in manage of any shares expressed by the founders of the company (a so-called “Co Founder Collaboration Agreement India-sale” right). Yet generally speaking, keep in mind rights embodied in an Investors’ Rights Agreement would be right to join one’s stock with the SEC, the ideal to receive information of the company on the consistent basis, and proper to purchase stock in any new issuance.

Investors’ Rights Agreements – Three Basic Rights

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