Understanding Investors Rights Agreements

When making an investment in a closely held corporation, an investor will typically require certain rights with respect to the company, especially where the amount of the investment only amounts to a minority interest in the company. The following are the most typical of these rights:

Right of First Offer. Enables investors to maintain a pro rata ownership of the Company in the event of future stock offerings.

Reports and Financial Information. Requires the company to provide the investor with financial information and reports.

Observer Rights. Requires the company to provide the investor with notice and the opportunity to observe and provide input at Directors meetings.

Inspection Rights. Enables the investor to inspect the company’s books and records and to discuss the Company’s affairs, finances and accounts with its officers

Provisions to Address Unique Concerns. Provisions that can require a wide range of unique provisions, such as the obligation to obtain the investor’s consent to “major” transactions.

The use of an Investors Rights Agreement can enable a corporation to make a potential investor feel comfortable enough to acquire a minority interest in a closely held company or make a loan to a company that would otherwise be unable to attract capital.