How to Track a Management Rights Letter After Close

How to track a management rights letter is a VCOC-rights ledger on the signed letter, not an Investors' Rights Agreement information-rights row. For each letter, log the letter date, the Investor named, whether that Investor already has a board seat, the consultation and inspection rights copied, whether board materials are copied to a representative, the CFIUS carve-out copied, and whether the letter is still in force (yes or no, and the termination event). Raziel's information rights tracking page is the IRA reporting book. This page is the letter that runs directly from the portfolio company to the fund.

This is not legal, tax, or investment advice. Raziel does not provide it. Copy the signed letter. Do not invent a VCOC exemption from a missing PDF.

What this management-rights ledger is (and is not)

The National Venture Capital Association (NVCA) Model Management Rights Letter (Updated July 2020, Word file fetched from NVCA) is a starting point. It is not legal advice for particular facts. The preliminary notes state that if a pension plan covered by the Employee Retirement Income Security Act of 1974 (ERISA) invests in a venture fund, then all of the fund's assets, including portfolio companies, are treated as assets of that ERISA Plan, absent an exemption. The U.S. Department of Labor plan-assets regulation at 29 C.F.R. section 2510.3-101(d) sets out the venture capital operating company (VCOC) exemption. A VCOC must have at least 50 percent of its assets (valued at cost, other than short-term investments pending long-term commitment) in venture capital investments, and it must actually exercise management rights with respect to one or more of those operating companies in the ordinary course of its business. 29 C.F.R. section 2510.3-101(d)(3)(ii) defines management rights as contractual rights directly between the investor and an operating company to substantially participate in, or substantially influence the conduct of, the management of the operating company. Department of Labor Advisory Opinion 95-04A (February 22, 1995) repeats those tests. An IRA information-rights schedule is not this letter.

Seven columns on one management-rights-letter row

Open one row per issuer per Investor after the letter is signed. If a later letter restates the rights, keep the same row and attach the new PDF.

• Letter date. Copy the date on the letterhead. NVCA prints a blank. Store missing if undated.

• Investor named. The fund (or parallel vehicle) that is the Investor on the letter. NVCA: the rights are effective as of the purchase of a stated number of shares of a stated preferred series, and they sit in addition to financing-wide information and inspection rights. Copy the share count and series if printed.

• Board seat (yes / no). Two optional NVCA paragraphs open with If Investor is not represented on the Company's Board of Directors. If the Investor already designates a director, those consultation and board-packet paragraphs may be inapplicable. Copy yes or no from the signed paper.

• Consultation and inspection rights copied. NVCA optional paragraph: consult with and advise management on significant business issues, including proposed annual operating plans, and meet regularly during each year at the Company's facilities. Next optional paragraph: examine the books and records, inspect facilities, and request information at reasonable times and intervals concerning the general status of the Company's financial condition and operations, provided that access to highly confidential proprietary information and facilities need not be provided. Copy the signed sentences. Store silent if a paragraph was struck.

• Board-materials copy (yes / no). NVCA optional paragraph (again, if no board seat): concurrently with delivery to the Board, give a representative of Investor copies of all notices, minutes, consents, and other material provided to directors, with a good-faith privilege carve-out. This is a packet copy, not an observer seat. Raziel's board observer tracking page is the invite itself.

• CFIUS carve-out copied. NVCA optional paragraph: solely by reason of becoming party to this letter, Investor will not obtain, and the Company will not provide, control, board membership, observer or nomination rights, access to material nonpublic technical information (financial performance information is carved back out), or involvement (other than through voting of shares) in substantive decision making regarding sensitive personal data of U.S. citizens, critical technologies, or covered investment critical infrastructure, as those terms are used in Section 721 of the Defense Production Act, as amended. Copy the signed carve-out. Store silent if omitted.

• Still in force (yes / no, termination event). NVCA: the rights terminate upon (a) no shares held by the Investor or its affiliates; (b) a firm-commitment underwritten public offering under the Securities Act of 1933; or (c) a merger or consolidation effected for independent business reasons unrelated to extinguishing such rights, and for purposes other than a reincorporation or a holding-company formation, with a further bracketed requirement that the successor provide reasonably comparable rights or that the consideration consist solely of cash or listed securities. Confidentiality obligations survive. Copy which event, if any, has fired.

Copy the signed letter, not a VCOC blog default

Do not paste one letter per deal as a statutory rule. The Department of Labor requires management rights on venture capital investments that count toward the 50 percent test, and actual exercise with respect to one or more operating companies. NVCA's notes say a venture fund will generally ask each portfolio company to sign a letter at the initial investment. The July 2020 NVCA Word file (fetched from NVCA) is optional clauses in brackets. Your executed letter controls.

When the ledger holds

The row holds if the seven cells are copied from the PDF (or marked missing). It fails when you invent a VCOC exemption from an IRA information-rights schedule, book the letter as a board observer seat, or treat a terminated letter as live after an IPO or a qualifying merger. Raziel's startup investment tracker is the book those letters should sit on: documents, dates, cap tables, IRR and MOIC. Raziel does not interpret your management rights letter. Copy the seven columns.