May 17, 2024

Venture Capital: Information Rights

Major investors in VC-backed financings customarily obtain contractual rights to receive access to financial and certain other information from the company.  In some cases, these rights include the ability to appoint an observer to attend board meetings. This Morrison & Foerster memo provides an overview of these contractual provisions and discusses the specific information rights that companies typically provide.  This excerpt describes some of the financial information with which major investors are customarily provided:

Annual financial statements. Investors often negotiate for the right to receive annual financial statements (i.e., balance sheet, statements and income and cash flows, and a statement of stockholders’ equity) as of the end of the fiscal year. These financial statements are typically delivered to investors within 90-180 days after the end of the company’s fiscal year. Investors may negotiate to receive audited financial statements, certified by independent public accountants of a nationally recognized firm.

However, providing audited financials can be expensive for early stage companies, especially during the first few months of the year when public companies are demanding much of the attention of the accounting firms, and so it is not unusual for early stage companies to provide unaudited financials until later rounds of financing. Investors can also require that the financial statements must be certified by an officer of the company. The certification statement will show that the financial statements were prepared in a way that is consistent with generally accepted accounting principles (GAAP) and fairly present the company’s financial condition.

Quarterly financial statements. Investors will also often negotiate for the right to receive unaudited quarterly financial statements for the first three quarters of the company’s fiscal year. These statements are typically delivered to investors within 45 days after the end of the fiscal quarter.

Other specific items of information that may be provided to investors under the terms of these contractual rights include a quarterly update on the cap table, monthly p&l information, and a board-approved annual budget and business plan.  Investors may also negotiate for the right to receive other business and financial information that they may reasonably request.

John Jenkins