Today, we’re continuing our series on key term sheet provisions by discussing registration rights.
What Are Registration Rights?
Before you understand registration rights, you should familiarize yourself with registration statements. Form S-1 is the registration statement companies file with the SEC to become a publicly traded company. If you want to see what a completed S-1 looks like, you can check out Facebook’s registration statement here.
Registration rights define the rights of investors to cause the company to file a registration statement, or to participate in a registration. The registration rights also apply to initial registrations (when the company “goes public”) and to registrationss made after a company has gone public.
What Are the Different Provisions That Make Up the Registration Rights Section?
There are three types of registration provisions within the registration rights section.
Demand registration enables investors to compel the company to register the investors’ shares provided that a minimum threshold of investors request the registration, and provided that an agreed time period has lapsed.
S-3 registration provisions allow investors to force registration any time the company meets the requirements for an S-3 registration. An S-3 registration is a less arduous form of registration, and is typically only used when a company has already been publicly trading shares for more than a year.
Piggyback registration provisions allow investors to include their shares in any company registration, subject to certain restrictions.
There are two other terms that are nearly always present in the registration rights section. First, there is usually any “expenses” provision that requires the company to bear all registration expenses, including the expenses for the demands, piggybacks, and S-3 registrations. Second, there is usually a “lockup provision” that prohibit investors from selling their shares for some time period (often 180 days) following a public offering.
What Are the Key Takeaways for Founders on Registration Rights Provisions?
First, registration rights are not worth spending much energy on in negotiations. Registration rights are nearly always included, and the terms of the registration rights generally don’t vary significantly.
Second, along the same lines, it’s important to remember that if registration rights come into play, it’s very likely that all parties involved will be thrilled. Investors and founders are not in litigious moods when their companies go public, so these clauses are not likely to end up being the subject of a heated court room battle.
Third, although registration rights are not usually a term of consequence, founders should understand that these provisions, like many of the other provisions we’ve discussed, are all about providing investors with another way to exit the company.