Demand Rights . . . 

are contractual agreements that entitle an investor to force a company to register his shares of company stock so that he can sell them to the public. Demand rights are often contrasted with piggyback rights, which allow an investor to include his shares of stock in a public offering that the company voluntarily conducts for its own benefit.

Most venture capitalists require companies to grant them demand rights as a condition to their investing. Demand rights enable the investor to liquidate his investment by forcing the company to register his shares for sale to the public. This registration process, however, is expensive and time-consuming. And a public sale at the wrong time can reduce the future value of a company's shares. Because this can increase a company's cost of raising equity in the future, the number of demand rights granted and the conditions under which they can be exercised are usually heavily negotiated issues.

The outcome of those negotiations can seriously affect the value of a funding and the future success of a company. Among the points management frequently seeks to obtain in negotiations over demand rights are:

• Limitations on the number of demand rights. One demand right is preferred. The fewer demand rights the better for management.
  

• Control over when the demand right may be first exercised. Typically, managements seek to delay a demand registration until at least 12 months after the company has conducted a company initiated initial pubic offering. Alternatively, management’s negotiate for a fixed period of time, such as three years, during which the demand right may not be exercised.
  

• Minimum requirements to exercise a demand right. Usually, this translates into a requirement that a fixed minimum number of shares be offered for sale and that the proposed offering be of at least a certain minimum dollar size.
  

• Rights to delay or convert a demand registration. Managements routinely request the right to delay a demand offering for a fixed maximum period of time if the company’s directors have commenced preparations for a public offering or believe a delay would benefit an offering because of market or other conditions. They also frequently request the right to convert a demand offering into a company initiated offering to give the company preference and control over the number of shares offered.

See: Piggyback Rights, Private Placements, Registration Rights. See also: Going Public, IPO’s (Initial Public Offerings), Public Offering.