Today we’re continuing our key term sheet provisions series by taking a look at information rights. I almost skipped over this provision because information rights are ubiquitous and relatively unimportant. But before you agree to any terms you should understand their ramifications, even if your lawyer says they’re relatively unimportant. So in the interest of thoroughness, here are a few words on information rights:
What are information rights?
Information rights grant shareholders, including investors, the right to receive specific company records typically including, among other records, audited annual financial statements, unaudited quarterly statements and annual budgets. Information rights also grant shareholders the right to inspect records on the company premises.
Why aren’t they that important?
Information rights are not that important of a term for a company to focus on because they are included in every agreement, don’t typically vary too much, and tend not to be much of a burden on the company. Moreover, companies should be transparent with their investors about the health and progress of the company. There’s not much that’s controversial about granting shareholders a right to know about how the company is doing.
Is there anything important to keep in mind when reviewing these provisions?
Founders should ensure that the reporting duties are not overly burdensome. For example, absent some unusual condition, companies don’t need to provide audited quarterly financial statements, and should fight against being forced to do so. Second, companies should require investors to agree to keep confidential information confidential. Some of the documents that will be provided under information rights provisions will be confidential non-public information, and company executives would be wise to take reasonable steps to protect this information.