While there are laws requiring companies to disclose certain basic corporate information to their Investors, Investors with a certain minimum amount of money invested in the Company may also negotiate disclosure of more information than what is legally required. This may be negotiated to assure major Investors that the Company is being run properly. Companies should be cautious in allowing excessive management and information rights, as Investors may become overly involved in the day-to-day business processes, which can be distracting and risky for various reasons.
The Investors’ Rights Agreement typically includes the following rights available to all Investors (or, more often, just the Major Investors):
- Access to the Company’s facilities with advance notice;
- Company financial statements delivered periodically (annual, quarterly, or monthly);
- Annual access to the budget, future revenue, expenses, and cash position report; and
- Quarterly access to an updated document detailing ownership of the Company, and securities and shares in the Company including stock, convertible notes, warrants, and equity grants (“capitalization table,” or “cap table”).
Also, certain Management and Information Rights for a specific Investor can be included in a management rights letter. Venture Capital investment firms typically ask for this letter, as it exempts them from certain federal regulation requirements under the Employee Retirement Income Security Act of 1974 (“ERISA”) when investing in a startup Company. If the Venture Capital Investor negotiates for a management rights letter, they can qualify as a Venture Capital Operating Company (“VCOC”), which exempts them certain ERISA regulations. If they do not, the Venture Capital Investor’s investment can be controlled by this Act, which can trigger unwanted fiduciary duties for their fund managers.
Term Sheet Language: A Management Rights letter from the Company, in a form reasonably acceptable to the Investors, will be delivered prior to Closing to each Investor that requires one.
Any [Major] Investor (who is not a competitor) will be granted access to Company facilities and personnel during normal business hours and with reasonable advance notification. The Company will deliver to such [Major] Investor (i) annual, quarterly, [and monthly] financial statements, and other information as determined by the Board of Directors; [and] (ii) thirty days prior to the end of each fiscal year, a comprehensive operating budget forecasting the Company’s revenues, expenses, and cash position on a month-to-month basis for the upcoming fiscal year[; and (iii) promptly following the end of each quarter an up-to-date capitalization table].