Term Sheets: What are information and inspection rights?
This week we continue our series on key VC financing deal terms.
This week’s question: What do I need to know about information and inspection rights?
Our answer: Information and inspection rights allow certain investors to monitor their investment by accessing key financial, ownership, and performance related information about the company. Information rights often include delivery of financial statements, budgets, business plans and cap tables on a regular basis (ie. monthly, quarterly, or annually). Inspection rights allow investors to review corporate books and records, visit the startup’s offices, and speak with officers. Unlike public companies that must disclose financials and other information by law, startups typically only provide access to such sensitive information through negotiated agreements such as the Investors’ Rights Agreement (IRA) or a separate side letter. These rights are typically limited to “Major Investors”; a defined term in the IRA that typically refers to investors (often just the lead(s)) who have invested a certain minimum amount. Our recommendation is to balance transparency with the practical costs of providing and protecting sensitive information by ensuring that the rights you offer are standard based on consulting with your startup’s counsel and using National Venture Capital Association (NVCA) model documents as a baseline.
Key Considerations
1. Major Investor Threshold. Be diligent in negotiating the “Major Investor” defined threshold because if it’s too low you risk exposing sensitive data to numerous parties and imposing administrative burdens on your startup.
2. Unaudited Financials. Especially for an early stage startup, push to have financial statements be unaudited (although in compliance with generally accepted accounting principles) to avoid the hassle and expense of a full-scale audit.
3. Carveouts. Use carveouts strategically to limit information obligations. For example, limit inspection rights to reasonable requests during normal business hours, prevent access to certain sensitive or privileged information, or, if possible, push to exclude competitors such as investors who are tied to portfolio companies that are competing with yours.
4. Scope and Frequency. Set clear and reasonable expectations on how often information must be delivered (ie. monthly, quarterly, annual).
Why It Matters
Information and inspection rights are a key negotiation point that reflects the balance of control and transparency between startup and investor. Poorly drafted or overly broad rights can expose your startup to risk, distraction, or misuse of its most sensitive information. Well-structured rights that follow market-standard terms give investors confidence while protecting your startup’s interests.
