The Term Sheet - 5 Things Investors Need to Know About Information Rights and Registration

 

The Course on Venture Capital & Startup Investing - Information rights & registration within the term sheet. Expert angel investor and venture capitalist Ross Blankenship describes the term sheet and why information rights and registration matter for investors. Learn about the term sheet now.

There are multiple additional clauses to consider when putting together a venture capital investment agreement, and some sections of agreement powers tend to be relegated to boilerplate technical consideration. However, they can have a real impact on either the information the investor receives about the company once an investment is made as well as participating in any change to company shares when registered to go public. The two big areas that affect these conditions are the information right clause and the registration rights clause.

Keeping Tabs on What's Going On | Information Rights and Registration

When it comes to a venture capital investor’s knowledge of what’s going on with a supported company, there should be a full expectation that the investor will want to see regular reporting and periodic status metrics of ongoing company performance. In term sheet language this is often seen worded under clauses known as the “information rights.”

The information rights provision allows an investor to essentially have open or partial access to the company. That power doesn’t include just the records. It also means the investor can have access to the company's physical facilities, to talk to personnel (employees and contractors), to see what’s going on with products or service delivery being developed, and essentially the same access that the company founders have as the main managers. The range of scope access of the information rights in an agreement depends on the wording used and executed in the signed VC agreement.

For example, the information rights can be limited or expanded to:

  • Specific investors only, barring smaller players out of the picture entirely or providing company information on other investors' involvement as it occurs.
  • A prior review of any major information or release from the company that would go public and affect its valuation or market viability.
  • Access to key product inventors or generator employees to determine what new products or services are in play for the future.
  • Alternatively, the rights could be periodic, following more of a quarterly or schedule access to company activities and records versus an all-inclusive access, which would obviously reduce stress in the company and the burden of stopping and explaining what’s going ad hoc.
  • Reasonable advance notice, limits on the amount and type and scale of record demands, limits of which employees are talked to also can be crafted into such rights.

Many savvy founders of startups and investors in startups are going to push for information and access limitations during the agreement drafting, trying to reduce the amount of daily oversight that would otherwise occur from the investor. And some balance should be struck so that the reporting doesn't become a massive workload drain on the company's limited resources, especially during initial startup phase when every dollar counts towards making success happen. The above said, information rights are commonplace and expected in VC agreements for investment transparency.

Taking a Share in Issuance

VC and registration rights are an entirely different matter altogether. They come in two forms: “piggyback” registration rights and demand registration. Demand rights involve a power that allows the investor to demand the company register its shares after a set time period, typically a few to five years. The piggyback registration, on the other hand, allows investors with registrable shares to automatically get a portion of any other class shares of the company being registered as well. It’s important not to get too hung up in the power to call a registration, however. At the end of the day, it will be the third party bank or brokerage that determines the best way for a private company to go public, regardless of what may have been agreed upon in the original VC agreement. However, when it does occur, the term sheet and registration clause at least ensures the investor always has an automatic play in the matter with any issuance.

If you want to learn more about the terms sheet, investor rights, or how to make investments with private equity, get in contact with Angel Kings' expert investing team today,  (202) 780-1010

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