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Information Rights

Definition An information rights provision in a term sheet outlines the information a company must deliver to investors beyond what state law requires.* Generally, this includes a commitment to deliver regular financial statements and a budget to investors. A term sheet’s information rights typically terminates in the event of an IPO and often gives investors access to the company’s facilities and personnel.*

While the default reporting period is quarterly, investors may ask for financial statements on a monthly basis early in a company’s life. Many companies elect to provide monthly financials to major investors for a long time.

Founders have a wide range of opinions about transparency. Some founders won’t mind sending every investor their financial statements monthly, and others will be less comfortable sharing information with too many people. Sending your financial statements to each different investor when they request it can become burdensome, and founders should consider how comfortable they are with their financial statements being in the hands of a large number of investors. If you do grant information rights to investors below your major investor threshold, make sure you aren’t committing to providing two different sets of documents on two different schedules to different investors after you raise a further round of funding.

When offering any information rights at the seed stage, make it clear to each group that they will have the same information rights and schedules as your Series A investors. Keep in mind that there may be a major investor threshold in a subsequent round that is higher than a previous investor’s ownership percentage, and you’ll likely need to continue to agree to information rights for those who have held them before.

important Note that information rights may be reserved for major investors.

controversy In addition to paying their own lawyers for work done related to negotiating a term sheet, the vast majority of venture capital funds require the startups they invest in to pay for a portion of the investors’ legal bills. Investors’ legal fees, if not paid for by the startup, come out of investors’ management fees. A small group of venture capital firms, including K9 Ventures, Afore Capital, Bloomberg Beta, Homebrew, and Spark Capital, believe investors should pay their own legal expenses. Critics believe these firms are employing a marketing tactic akin to “founder-friendly religious activity,” saying that who pays legal expenses is a minor point in the scale of an investment deal, and over-negotiating on the bill is ultimately a waste of energy.

At the very least, founders can manage the legal fees by putting a cap on them. In early-stage deals, a cap of $10K–$25K should be acceptable. Caps on legal fees can be powerful when founders are negotiating with a syndicate, as it motivates the investors to coordinate the legal activity rather than throwing a gaggle of lawyers into the negotiation.

For most financings, the majority of the legal costs come from legal diligence and corporate records cleanup, not the back-and-forth between lawyers arguing over the terms of a term sheet or the stock purchase agreement in the long-form docs.

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