Registration rights allow investors to demand that the company register their shares with the SEC under certain circumstances. Stock in startup companies is generally restricted and cannot be publicly sold unless registered with the SEC. Investors will insist on registration rights to make sure that they can eventually sell their securities on the public market.

There are basically three types of registration rights for investors, and most term sheets include all three: 1) the ability of preferred shareholders to demand a full registration after a certain time period or an IPO ("Demand Registration"); 2) the ability of preferred shareholders to demand a less-expensive Form S-3 registration ("S-3 Registration"); and 3) the ability of investors to have their shares registered if the company registers other shares as part of a public sale (the "piggyback registration" right).

The key to understanding registration is that it's really expensive-it requires the company to have audited financials and prepare extensive disclosures for potential buyers, with easily tens-of-thousands of dollars going to lawyers, accountants, and others-so founders should negotiate reasonable limits on registration. Investors will usually insist on registration rights, and the founders should be able to come up with a reasonable compromise. Here are a few things to keep in mind:

Time Frame. Investors have the right to demand registration after a certain time from when they make their investment (usually three to five years, and up to seven), or within a certain period after an IPO (usually six to eight months). The company should try to maximize the length of these holding periods.

Size of the Offering. For demand registration, investors can't force the company to register their shares unless the shares are being offered for a certain amount of money, usually in the $5-15 million range. For S-3 registration, the size is usually $1-5 million.

Approval Percentage. A certain percentage of the preferred must agree to the registration before the company can be forced to register the shares, under either a full registration or an S-3 registration. Both the company and investors should be able to agree to a reasonable percentage that is high enough to assure that there is a lot of investor interest before a registration and to prevent a single minority investor from causing a registration and costing the company a ton of money. For S-3 registrations, which are much less expensive, a lower percentage is reasonable.

Number of Registrations. Generally companies will limit demand registrations to one or two total, and S-3 registrations to one or two per year.

Limitation on Piggyback. In a public sale, the company and its underwriters should have the ability to limit the registration of the investors' shares if it will impact the public offering.