Term Sheets: What are registration rights?
This week we continue our series on key VC financing deal terms.
This week’s question: What do I need to know about registration rights in a VC financing?
Our answer: Registration rights let investors require a startup to register their shares with the Securities and Exchange Commission (SEC) – typically in connection with an IPO – so that the shares can be sold publicly. The two main types are: (i) Demand Rights, which let investors demand a registration and (ii) Piggyback Rights, which let them piggyback on a registration already underway. There are subcategories of Demand Rights such as S-3 Rights for follow-on offerings, but that’s too granular for this post; the key is understanding the primary categories
Our recommendation is that, unless your startup is nearing an IPO or exit requiring registration, you don’t need to master every detail of registration rights, but you should understand the basics and ensure the rights you offer are standard by consulting company counsel and using National Venture Capital Association (NVCA) model documents as a baseline.
Key Considerations
While registration rights are mostly about managing long-term expectations, they can carry significant implications if you’re not paying attention. Here’s what to keep in mind:
1. Cost Allocation. Startups usually cover the costs of registration, but make sure the agreement is clear about what’s included (legal, accounting, printing, etc.) and exclude extraordinary expenses if possible.
2. Frequency. Make sure there are reasonable limits on registration rights (e.g. capping demand registrations to only 2 or 3 times) and avoid open-ended obligations that could extend well beyond the IPO.
3. Company Controls Timing. The registration rights should provide that the company maintains control over timing and allows teh company to delay or cease registration for legitimate business reasons and at the discretion of the Board of Directors.
4. Uniformity. After multiple priced rounds, you should ensure that your registration rights obligations are manageable and relatively uniform across all your investors to avoid unnecessary complexity.
5. IPO Terms. You should be aware of how registration rights intersect with IPO lockups and underwriter discretion. For example, many agreements include carve-outs allowing underwriters to limit the number of shares sold by investors to protect the offering.
Why It Matters
Registration rights may seem like a future problem, but they’re part of your investor relationship and may resurface at critical moments such as the IPO. Aggressive or poorly drafted terms can cause friction when you need alignment the most. Familiarize yourself with NVCA standard terms and loop in your legal team to avoid missteps. You’ll be glad you did when going public becomes reality.
