Investor Rights to Information: Harmless or Overreach?

One crucial clause that often appears, and which founders must understand thoroughly, is “Information & Inspection Rights.” This section outlines what information investors are entitled to receive about your company and their right to review your operations.

Definition

Information & Inspection Rights grant investors the contractual ability to access a startup’s financial and operational data, and in some cases, physically inspect the company’s premises and records. This is distinct from public companies that have statutory disclosure requirements; for startups, these rights are specifically negotiated and documented, typically within an Investors’ Rights Agreement (IRA). They may also be a part of the Share Subscription and Shareholders’ Agreement (SSSHA).

Think of it as an investor’s “right to know” and “right to see.” They’ve put their money into your company, and this clause ensures they can monitor its health and progress.

Why it Matters?

This clause is vital for both investors and founders:

  • For Investors: It allows them to monitor their investment, assess the company’s performance, ensure their capital is being used effectively, and provide guidance when necessary. It’s a key part of their due diligence and ongoing oversight. Venture capital firms, in particular, often have their own reporting requirements to their limited partners (LPs), making these rights essential for compliance.
  • For Founders: While it brings transparency, it also imposes reporting obligations and can impact operational autonomy. Understanding and negotiating these terms prevents excessive administrative burden and protects sensitive company information.

Common Variations

Information & Inspection Rights can vary significantly based on the stage of the startup, the amount of investment, and the negotiation leverage of both parties.

  • Types of Information:
    • Financial Statements: Most commonly, investors will request annual (audited or unaudited) and quarterly financial statements (balance sheet, income statement, cash flow). Some may even push for monthly income statements and balance sheets, though this is less common for early-stage companies due to the administrative burden.
    • Capitalization Table: Regular updates (e.g., quarterly) on the company’s capitalization table, which details ownership percentages.
    • Annual Budget & Business Plan: Investors often require a board-approved annual budget and business plan, often prepared monthly, to track performance against projections.
    • Catch-all Requests: Some clauses might include a “catch-all” provision allowing investors to request other information related to the company’s financial condition, business, prospects, or corporate affairs.
  • Who Gets These Rights (Limitations):
    • Major Investors: Typically, these rights are granted only to “Major Investors,” a defined term in the IRA referring to investors who have put in a certain minimum amount of capital (often the lead investors). This limits the reporting burden on the company.
    • Competitor Exclusion: Companies often seek to exclude investors who are direct competitors to prevent the misuse of sensitive information. Lead investors may negotiate a carve-out for themselves, regardless of competitor status.
    • Confidentiality: Information is usually shared under strict confidentiality agreements, ensuring it’s not disclosed to third parties.
    • Trade Secrets & Attorney-Client Privilege: The company is generally not required to share trade secrets or information that would jeopardize attorney-client privilege.
  • Inspection Rights: Beyond just receiving reports, “Inspection Rights” allow “Major Investors” (who are not competitors) to:
    • Visit and inspect the company’s properties.
    • Examine its books of accounts and records.
    • Discuss the company’s affairs, finances, and accounts with its officers. These rights are usually exercised during normal business hours with reasonable advance notice.
  • Observer Rights (Related but Different): Sometimes, investors may also negotiate for “observer rights,” which allow a representative (board observer) to attend board meetings but typically without voting rights. This provides a deeper insight into governance and strategic discussions.

Examples:

A typical “Information Rights” clause might state: “The Company shall deliver to each Major Investor (a) within 90 days after the end of each fiscal year, unaudited annual financial statements; (b) within 45 days after the end of each of the first three fiscal quarters, unaudited quarterly financial statements; (c) within 30 days after the end of each month, unaudited monthly income statements; and (d) within 30 days prior to the beginning of each fiscal year, an annual budget and business plan approved by the Board of Directors. All financial statements shall be prepared in accordance with GAAP.”

For “Inspection Rights,” it might say: “Each Major Investor shall have the right to inspect the books and records and facilities of the Company at reasonable times upon reasonable notice during normal business hours, and to discuss the affairs, finances and accounts of the Company with its officers.”

Evolv’s Recommendations:

Founders should approach Information & Inspection Rights strategically:

  • Balance Transparency with Burden: While transparency fosters trust, an overly broad clause can create a significant administrative burden for a lean startup team. Be prepared to negotiate the frequency and granularity of reports. Monthly reporting, for instance, can be very demanding for early-stage companies.
  • Define “Major Investor”: Ensure the definition of “Major Investor” is reasonable and ties to a substantial investment amount. This limits the number of parties to whom detailed information must be provided.
  • Protect Confidentiality & IP: Insist on robust confidentiality clauses and clear carve-outs for trade secrets and privileged information. You don’t want to inadvertently share competitive advantages or compromise legal positions.
  • Reasonable Access for Inspection: Ensure inspection rights are qualified with “reasonable notice” and “normal business hours” to avoid disruptions to your operations.
  • Be Mindful of Competitors: If an investor has competing interests, try to limit or exclude their access to highly sensitive competitive data.
  • Understand Observer Rights: If observer rights are included, clarify their scope – typically, observers should not have voting rights or access to attorney-client privileged discussions.

Seek Legal Counsel: Always have an experienced startup attorney review your term sheet. They can help you understand the nuances of these clauses, identify potential red flags, and negotiate terms that are fair and sustainable for your company’s growth.