Understanding Investor Information Rights

Nov 6, 2024

EARLY-STAGE-STARTUP-TAXES

When you’re in the beginning stages of getting your company off the ground, it’s tempting to promise investors the moon and stars in exchange for the capital you need. Without their money, after all, you’re going to have a much harder time turning your dream into a reality.

Don’t get too hasty here, though. The promises you make to investors in your early stages will follow your company for years to come. Unless that investor cashes out, you’re going to have to continue fulfilling your obligations to them. 

A lot of founders know to be wary in particular areas here. If you give major investors the first right of refusal, for example, you could run into problems as you bring on other large investors down the road. 

But that’s not the only area to be wary. Today, we’re focusing on investor information rights. Let’s take a look at what they usually include and when you might want to extend them to investors. 

 

Information rights and when to grant them

Remember that investing in your company doesn’t automatically entitle the investor to anything. Instead, they only get the rights that are spelled out in the agreement that gets drawn up around their investment. 

In most cases, if the investment is large enough, the investor will expect information rights. These entitle the investor to regular updates about the company, usually in the form of predetermined documentation delivered on a predetermined schedule (e.g., quarterly financial statements, annual balance sheets). 

Fortunately, offering on investor information rights doesn’t dilute them for the next investor. Theoretically, you could extend these rights to every investor who gets involved above a certain threshold. 

In fact, some founders apply the thinking that if they’ll need to ready this documentation anyway, there’s no harm in simply distributing it more places.

That might be true, but there are a couple of points of consideration here. 

First, many major investors want the information rights tailored to their preferences. One might want your yearly books to be audited by a CPA before they see them, for example. The more personalization investors feel entitled to ask for, the more work fulfilling that information right becomes for you and your team. 

Secondly, many information rights agreements include a section allowing the investor to make reasonable requests for any other information they deem necessary. If you hand over information that raises questions — or concerns — for the investor, you need to be ready for them to exercise their right to request more details. And that makes even more work for you and your team. 

All of this isn’t to say that you should never agree to an investor’s information rights. You should, however, carefully read the terms of the investing agreement to be sure you understand exactly what these rights mean — and how much effort fulfilling them might require from your company. 

 

What investor information rights entail

Usually, the investing agreement will dictate that your company is required to distribute certain pieces of information to the investor on a regular cadence. Many investors structure their information rights to ensure they have a comprehensive view of your company’s financial state and trajectory throughout the year. 

Generally, that means you’ll be required to hand over financial documentation on at least a quarterly basis. 

Specifically, the information rights might require you to deliver:

  • A balance sheet
  • An income statement
  • A cash flow statement 
  • Your budget
  • Your capitalization table
  • Month-over-month, quarter-over-quarter, or year-over-year comparisons

The investing agreement will also clarify how long you have to get these things prepared and delivered to the investor. You might have 90 days from the end of the year to prepare your annual balance sheet, income statement, and cash flow statement, for example, but only 30 days from the end of each quarter to hand over the previous quarter’s financial statements. 

 

A common pairing with information rights: Inspection rights

Some investors will include another component alongside their information rights: inspection rights. These give the investor the right to look at your books, your workplaces, and just about anything else. If the investor wants full transparency into your operations, you should be ready for them to include inspection rights in their investing agreement. That means you should always have your books in a state of readiness for inspection. 

In tandem with information and inspection rights, the investor might include the right to appoint someone who attends and reports on board meetings. Generally, this person won’t be able to vote. But they will be the investor’s eyes and ears about all the goings-on in the boardroom. 

 

Fulfilling your obligation to investors

To get investors to hand over a sizable sum for your company’s use, you generally need to be willing to loop them into your startup’s operations. Information rights play a key role here. They clarify what’s expected of you as far as financial information preparation and delivery goes. 

That said, some investors will tap additional rights — like the right to request additional information or inspection rights — to get further into the weeds with you. Before you accept any investment money, it’s critical that you fully understand what the agreement between you and that potential investor entails. 

It also helps to learn everything you can about their preferences and their engagement with past investments. If they’re notoriously difficult or overly involved, you might be better off seeking money elsewhere. 

When you do sign on the dotted line of an investment agreement, the information rights it lays out go into effect right away. So if you’ve been slacking on your financial recordkeeping, now’s the time to get on top of it.

Fortunately, this benefits you at the same time it enables you to adhere to the rights you’ve granted to the investor. The more accurate your financial data is, the better you’re able to track your burn rate, project where your company’s headed, and plan for success. 

Still, getting everything in order documentation-wise is usually a big lift. That’s where we come in.

At ShayCPA, we specialize in helping tech startups with their accounting needs. You can even delegate a big portion of the work required to comply with your investors’ information rights to us. We can prepare and distribute the financial documentation on the required schedule.

To explore how we can help you navigate information rights with your investors, get in touch.