What registration rights do investors receive in venture capital financings?
Takeaway: "Registration rights" are a standard and essential investor right that contractually obligates the company to register the investors' shares with the SEC in a future IPO, allowing them to sell their stock on the public market.
When a venture capital fund invests in your private startup, they are acquiring an illiquid asset. There is no public market where they can easily sell their shares. The entire venture capital model is predicated on an eventual "liquidity event"—an IPO or an acquisition—where they can finally convert their shares into cash.
Registration rights are a set of contractual obligations that a company gives to its major investors to facilitate this process in the event of an IPO. These rights are a standard part of every venture financing and are detailed in the Investors' Rights Agreement. They are the legal mechanism that ensures an investor can actually sell their stock once the company is public.
Why Are Registration Rights Necessary?
The stock issued by a private startup is an "unregistered security." Under federal securities law, it cannot be freely sold to the public. To be sold on a public stock exchange like the NASDAQ, the shares must be formally registered with the SEC through a complex and expensive process.
Registration rights give your investors the power to compel the company to go through this registration process for their shares.
The Three Types of Registration Rights
"Demand" Registration Rights: This is the most powerful right. It gives the investors the right to demand that the company conduct a public offering to register their shares, even if the company's management had not planned to do so. This is a powerful tool to force a liquidity event.
The Details: This right is typically only available to major investors, can only be exercised after a certain period of time (e.g., five years after the financing), and can only be used a limited number of times.
"Piggyback" Registration Rights: This is the most commonly used registration right. It gives investors the right to "piggyback" their shares onto a registration statement that the company has already decided to file.
How it Works: If the company decides to go public (an IPO), or if it decides to do a follow-on offering after its IPO, it must notify all the investors who have piggyback rights. Those investors then have the right to include their own shares in the company's registration statement to be sold to the public.
"S-3" Registration Rights: This is a simpler form of registration right that becomes available once a company is already public and is eligible to use a shorter registration form called a Form S-3. It allows investors to sell their shares in smaller, more frequent offerings after the IPO.
Registration rights are a fundamental part of the venture capital deal. They provide your investors with the contractual assurance that when the time is right, they will have a clear and legally defined path to achieving the liquidity that is the ultimate goal of their investment.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.