You sign the term sheet. The wire hits the bank account. You are ready to get back to building the product.
But taking outside capital comes with strings attached. One of the most common strings found in a venture capital deal is the clause concerning Information Rights.
At its core, this term grants an investor the legal right to receive specific financial statements and operational updates regarding the company’s condition.
It is about transparency.
Investors are putting capital at risk. To monitor that investment, they require a window into the financial health of the business. For a founder, this moves the company from a private project to a reporting entity.
The Scope of Reporting
#What exactly do you have to send?
It usually is not every receipt or invoice. The standard information rights clause typically requires three specific distinct buckets of data.
First, annual financial statements. These are often required within 90 to 120 days after the fiscal year ends. In later stages, investors may require these to be audited.
Second, quarterly or monthly unaudited financial statements. This usually includes a balance sheet, income statement, and a cash flow statement.
Third, an annual budget or operating plan. This is generally due 30 days prior to the start of the next fiscal year.
These requirements ensure that the board and significant shareholders know how much runway remains. It forces the founding team to maintain clean books from day one.
Major Investors vs. Standard Investors
#Do you have to send your balance sheet to the uncle who put in $5,000?
Probably not.
Information rights are rarely blanket rights given to every single person on the cap table. In most Series A or sophisticated seed deals, these rights are reserved for “Major Investors.”
A Major Investor is defined in the legal documents. It is usually an entity that holds a specific threshold of shares or invested above a certain dollar amount.
This distinction is critical for your administrative load.
If you have fifty small angel investors, do you want to manage fifty separate questions about your monthly burn rate?
Limiting these rights to the lead investors streamlines communication. It allows you to focus on the business rather than managing a massive investor relations department.
Contractual Rights vs. Statutory Rights
#It is important to distinguish between what you sign in a term sheet and what the law requires.
Information rights in a venture deal are contractual. You agree to them. If the company is sold or goes public, these rights generally terminate.
However, corporate law often grants basic inspection rights to shareholders regardless of the contract. For example, Delaware General Corporation Law Section 220 allows stockholders to inspect books and records for a “proper purpose.”
Contractual information rights are proactive. You send the data automatically.
Statutory rights are reactive. The shareholder has to demand them.
The Strategic Implication
#Why do some founders resist this?
Fear. There is a fear that sharing bad numbers will result in lost confidence. But in a startup environment, bad news ages poorly.
Sharing information regularly does two things.
It builds a cadence of accountability. It also creates a data trail that future investors will look at during due diligence. They want to see that you have been professional and transparent with your previous backers.
We must ask ourselves hard questions here. Does total transparency limit our ability to take risks? Or does it provide the safety net of advice when things go wrong?
Information rights should not be viewed as a burden. They are a mechanism for alignment.