Anatomy of a Term Sheet - Information Rights

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For more information on this post contact Scott Preece.

Most VCs will require information rights that force a company to provide periodic information (including financial information). The information rights are required for a couple of reasons:

  • VC’s are ultimately investment managers. The information rights allow them to monitor their investments as well as satisfy their reporting obligations to their investors/limited partners; and
  • taking institutional money requires companies to mature and put in place appropriate reporting and governance structures. Being required to prepare and provide the information is a good discipline.

You will not be able to negotiate out information rights, but entrepreneurs should pay attention to the specific rights requested and make sure they will not be overly burdensome.

Typical information rights (from the BVCA Model documents) require companies to:

  • prepare monthly management accounts with comparisons to budgets and containing trading and profit and loss accounts, balance sheets, cash flow statements and forecasts and shall deliver them to the Investors within [21] days after the end of each month;
  • prepare a detailed operating and capital budget and cash flow forecast in respect of each financial year of the company that shall be approved by the Board and the Investors and delivered to each Investor at least [30] days before the end of the Company's preceding financial year;
  • deliver the audited accounts of the company to the Investors within [four] months after the end of the accounting period to which such audited accounts relate;
  • prepare a schedule of the company’s issued share capital and any warrants and/or options to acquire shares and/or convertible securities, broken down by shareholder, option holder, warrant holder and convertible securities holder (as appropriate) and including the percentage of the fully diluted issued share capital held by each holder and shall deliver such share capital schedule to the Investors within [21] days after the end of each [quarter] in the company’s financial year.
  • provide each Investor promptly with such other information concerning the 
  • company and its business as that Investor may reasonably require from time to time.
  • provide the Investors with full details of any offer or proposed offer from any person wishing to enter into any sale or purchase any of the Company’s assets or share capital or loan capital.

Whilst it isn’t usually addressed in the term sheet, it should be noted that the information provided to a VC is subject to confidentiality provisions (which are contained in the shareholders’ agreement), which restricts the use and the distribution of any information (so a VC cannot pass the information on to another portfolio company or another investor or potential acquirer).

As a matter of English law, all shareholders should receive a copy of a company’s statutory (annual) accounts. Outside of this, entrepreneurs should seek to limit who receives information rights. Ideally, only “major” investors should receive information rights (and in the case of strategic investors you may wish to seek to further limit the information provided to the investor). Giving information rights to the smallest investor not only increases the administrative burden on a company but also increases the risk (regardless of any confidentiality provisions) of the information being disseminated outside of the company/shareholder group.

The Anatomy of a Term Sheet series can be found in full here

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