Term Sheet (10) Registration Rights How Investors Can Compel Startups to Go Public
The best way for a VC to exit is usually through an IPO, and there is no doubt about it. The most relevant provision in the Term Sheet for an IPO is the "Registration Rights", which is one of the most basic powers required by a VC.
The Registration Rights clause is usually the longest and most extensive clause in the Term Sheet. Common example sentences are as follows:
Registration Rights Classification Table
Look at so many, I think we are dizzy. Let's talk about something easy to understand.
1. The role of registration rights
Registration rights are established under the U.S. Securities Act and the U.S. Securities and Exchange Commission (SEC). To understand registration rights, you must first understand the restrictions on the issuance and trading of stocks under the U.S. Securities Act. Simply put, if a stock is not registered with the SEC, it is a Restricted Share and cannot be traded in the public market, even if the company is a public company. In the case of private placements such as venture capital, investors receive restricted shares and the best way to obtain liquidity is for the VC to require the company to register these restricted shares with the SEC.
What does that mean? Like Genghis Khan, Jiangnan seven monsters, Quanzhen capital and beggar's capital, they invested in North Hero Technology, that can not be money into it has been so put, or to have exit real estate channels, if the North Hero Technology was acquired, then directly from the acquisition price cash out, if it is listed, then either common shares or preferred shares, are required in the SEC If it is listed, then both common shares and preferred shares need to be registered with the SEC before they can be publicly offered.
2. Types of registration rights
(1) Demand Registration Right (DRR). A Demand Registration Right is a right given to VCs by a start-up company to voluntarily request the company to register its shares with the SEC for sale. This right exists when the company becomes a public company (i.e., an IPO), before and after, but its primary application is before the company goes public. That is, if the company has not yet had an IPO, then the company must simultaneously go through an IPO if the VC requires the right to register.
Guo Jing, the founder of North Hero Technology, thought Huang Rong was dead after he got separated from his co-founder, so he was discouraged and returned to his angel investor Genghis Khan's fund company to do odd jobs for a while, but later parted ways because of different investment philosophies, and at this time Guo Jing fell into a life of confusion. Technology, which could have become a unicorn startup company how can it be so abandoned. So he used the Demand Registration Right and told Guo Jing that the bottom of the company was still there, so he should hurry up to rectify his emotions and get listed on Huashan Darke. After all, Quanzhen Capital has the right to request registration, Guo Jing also followed this request to Huashan Dak, and eventually listed successfully.
(2) Co-registration Right (Piggyback Registration Right). Piggyback Registration Right gives VCs the right to request registration of their shares in the event of an IPO. Unlike the right to request registration, the co-registration right does not give investors the right to actively request an IPO of the company, but only allows them to register their shares with the company in the event of an IPO. North Knight Technology has achieved the listing of Huashan Dakar under the registration right requested by Series A investor Quanzhen Capital, so several other investors Genghis Khan, Jiangnan Seven, Beggar Capital, etc. will not be idle and will surely want to register our shares together, and then we can also sell them in the open market to realize.
(3) S-3 or F-3 Registration Right (S-3/F-3Registration Right). A Form S-3 is a simpler form of registration than the Form S-1 or F-1 used for IPOs, and a Form S-3 or F-3 registration is a form of registration that occurs 12 months or more after a company becomes a public company.
Of the above three registration rights, it can be simply understood that
- The right to request registration is a pre-IPO right of the company
- Common registration rights are the rights of the company at the time of the IPO
- S-3 or F-3 registration rights are the rights of the company after the IPO
3. Negotiating the terms of registration rights
The three types of registration rights have their own negotiation points, and since the registration requirement is the most important, we will focus on the usual negotiation points of the registration requirement.
1. the number of times VC obtains a claim for registration. Because registration is very expensive, companies usually only give it to VCs once, and VCs often ask for it twice.
2. the time threshold for exercising the rights. For early-stage investments, registration is required 5 years after the investment is delivered, while for late-stage investments, the period is much shorter, depending on the timing of the expected IPO. In addition, registration rights are required to be unenforceable for a period of time typically following the IPO (e.g., 6 months). For example, the registration right for Series A Jiangnan Seven Monsters is better than 5 years, because Jiangnan Seven Monsters entered North Hero Technology earlier, if they have a 3-year registration right, at that time Guo Jing is not ready yet, hard to go to IPO will not succeed. And to the C round of beggar capital registration rights can be a relatively short time, two or three years, because that time is already late in the north warrior technology, Hong Qi Gong proposed to ask for listing, north warrior technology is also basically have the strength of the listing.
3. the proportion of shares of the exercise threshold. The registration rights must be exercised by shareholders who own at least a certain minimum percentage of shares in the company, which is usually a certain percentage of the outstanding shares held by VCs. Companies often want this percentage to be high enough to prevent certain minority VC shareholders from exercising the right, which is usually set at about 25%. North Knight Technology was set a little low on this threshold at the time, only a 10%, so it led to a request for registration rights from a family of B round All True Capital, and Guo Jing had to go public. If set at 25%, then it is at least 2 rounds of investors together to request the right to register to be useful.
4. cost bearing. Usually, the company needs to pay the registration fee and needs to pay the investor's lawyer's fee (the fee can be capped).
5. Minimum offering amount. Because of the expense of registration, the company has to set a minimum condition for requesting registration rights so that it is a reasonable amount to issue. The minimum price is usually 3 to 5 times the purchase price of the preferred stock (5 times for early stage investments and 3 times for late stage investments), for a combined offering of $50 million or more. This is to limit investors from abusing their registration rights to bleed startups into IPOs before they are ready. When it comes to major decisions such as whether to merge or not, or whether to go public, founders often want to delay and prepare until they are fully ready to merge or go public, but investors are more concerned about maximizing financial benefits and do not care whether the founders have achieved their dreams. The investors' part is earned back.
The right to delay requesting registration. When a company has started preparing for an IPO, it is in the company's interest to delay registration when the company believes that market conditions are not good; or in other cases, the company usually requests a right to postpone registration for a maximum period of time, usually 6, 12, or 18 months are possible. This is that although Quanzhen Capital has made a request for Guo Jing to list in Huashan Dak, but Guo Jing said my co-founder has not yet found back, have to wait for Huang Rong to come back together to rush the listing.
