Venture capital investment often comes with a variety of complex documents. These documents can include stock purchase agreements, stockholder agreements, convertible notes, term sheets, and charter amendments. All of these documents typically arise during the early stages of investment.
However, one of the documents which young entrepreneurs fear most is the
management rights letter
Venture capital investors use the management rights letter in order to try and ensure that they are exempt from some specific federal regulations under ERISA – otherwise known as the Employee Retirement Income Security Act of 1974. In the case where no exemption is present, then a fund’s assets can be subject to a variety of tedious and complex regulations.
These regulations can place stringent fiduciary duties upon individuals who manage the fund. They can also effectively limit the fund manager from performing their duties. However, venture funds which qualify as a VCOC – also known as a venture capital operating company – are exempt from these federal regulations under ERISA.
For more information about drafting an effective management rights letter for your corporation, and for assistance with drafting that letter, you should contact the skilled Silicon Valley lawyers at Startup Company Counsel
Qualifying as a Venture Capital Investment
In the case where at least one-half of a particular fund’s assets are being invested in venture capital, that fund will meet the required qualifications for a VCOC. As such, it will be exempt from the stringent regulations imposed by ERISA.
Rights Guaranteed by a Management Rights Letter
A good management rights letter given by the corporation to the investor will allow an investor the following rights:
- The right to observe and attend all of the corporation’s board meetings
- The ability to consult with and contact individuals who are part of the company’s management
- The right to inspect certain company books and records
- The right to receive company financial statements on both a quarterly and an annual basis
These investor rights are very similar to the rights that many big investors may be able to negotiate as part of an investors’ rights agreement, stockholders’ agreement, or some other legal mechanism.
Contents of a Management Rights Letter
A management rights letter typically begins with a standard introductory paragraph. The letter then lists the various types of management rights which the investor will be afforded, including, among other things, the right to inspect the company’s books, sit in on board meetings, visit all of the company’s properties, and receive all of the corporation’s financial statements.
The main purpose of the letter is to provide the venture capital investor with the necessary evidence to show that he or she actively participates and influences the management of the company – so as to avoid the ERISA regulations and obtain the necessary ERISA exemption.
Call Startup Company Counsel to Speak with a Silicon Valley Corporate Attorney Today
At Startup Company Counsel, our experienced lawyers can help you draft an effective management rights letter that works for your corporate investors.To schedule a free consultation and case evaluation with a Silicon Valley corporate attorney, please call us at 408-441-7555 or contact us online today.