This sample document is the work product of a national coalition of attorneys who specialize in venture capital financings, working under the auspices of the NVCA. This document is intended to serve as a starting point only, and should be tailored to meet your specific requirements. This document should not be construed as legal advice for any particular facts or circumstances. Note that this sample document presents an array of (often mutually exclusive) options with respect to particular deal provisions.
MANAGEMENT RIGHTS LETTER
Preliminary Notes
The assets of a pension plan subject to the Employee Retirement Security Act of 1974 (“ERISA”) must be held in trust. Moreover, the persons responsible for managing those assets have significant fiduciary duties under ERISA and cannot engage in certain transactions prohibited by ERISA. If a pension plan covered by ERISA (an “ERISA Plan”) invests in a venture fund, then all of the fund’s assets - such as its investments in portfolio companies - are treated as assets of the ERISA Plan, absent an exemption. As a result, the trust requirement applies, the managing partner of the fund is treated as an ERISA fiduciary, and the fund must comply with the rules regarding prohibited transactions.
The U.S. Department of Labor, which is charged with administering ERISA, has issued regulations that contain certain exemptions from the plan assets rules. Under one (1) exemption, a venture fund is not deemed to hold ERISA plan assets if it qualifies as a venture capital operating company (a “VCOC”). To qualify as a VCOC, the fund must have at least fifty percent (50%) of its assets invested in venture capital investments. An investment in a portfolio company qualifies as a “venture capital investment” if the fund obtains certain management rights with respect to the portfolio company. “Management rights,” in turn, are defined as contractual rights running directly from the portfolio company to the fund that give the fund the right to participate substantially in, or substantially influence the conduct of, the management of the portfolio company. In addition to obtaining management rights, the fund is also required to actually exercise its management rights with respect to one (1) or more of its portfolio companies every year.
In order to build a case for an exemption from the ERISA Plan asset rules, a venture fund will generally ask each of its portfolio companies to sign a management rights letter in connection with the fund’s initial investment. An example of such a letter follows.
insert portfolio company letterhead
[effective date]
[investor name]
[investor street address]
Re: Management Rights
Ladies and Gentlemen:
This letter will confirm our agreement that pursuant to and effective as of your purchase of [number of shares] shares of Series [series letter] Preferred Stock of [company name] (the “Company”), [investor name] (the “Investor”) shall be entitled to the following contractual management rights, in addition to any rights to non-public financial information, inspection rights, and other rights specifically provided to all investors in the current financing:
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About this template
What is this template?
This is a letter agreement between an investor and a portfolio company that establishes formal management influence. It contains specific ERISA-driven VCOC qualification language and detailed carve-outs for CFIUS compliance. It is not an Investors’ Rights Agreement but depends on one for its confidentiality terms.
When should you use it?
Use this document during a venture capital financing round when the lead investor must maintain VCOC status to satisfy ERISA requirements. Use an Investors' Rights Agreement instead if you only need general information rights without the formal VCOC management participation structure.
What's inside
| Clause | Name | What it does |
|---|---|---|
| 1 | Consultation and Advice | The Investor may advise management on significant business issues and annual operating plans if they lack a Board seat. |
| 2 | Examination and Inspection | The Investor is permitted to examine Company books, records, and facilities at reasonable intervals, excluding highly confidential proprietary information. |
| 3 | Information and Board Access | The Company must provide the Investor's representative with Board notices, minutes, and materials concurrently with the Board of Directors. |
| 4 | CFIUS Limitations | Specific restrictions prevent the Investor from obtaining control or access to material nonpublic technical information to avoid CFIUS jurisdiction. |
| 5 | Confidentiality | All information learned through these rights is subject to the confidentiality provisions of the existing Investors’ Rights Agreement. |
| Termination | Termination | Management rights end upon an IPO, a specified merger, or when the Investor no longer holds any Company shares. |
Who it's for
- a venture capital fund needing to qualify as a VCOC under US ERISA regulations
- a startup issuing Series Preferred Stock to an institutional investor requiring management rights
- a portfolio company managing potential CFIUS jurisdiction regarding foreign investors
- pension plans subject to ERISA investing in venture capital funds
How long it runs and how it's signed
Law it's drafted under
United States note
This version is drafted for US law generally. Contract, employment and consumer rules vary by state — for example on non-competes and at-will employment. Tell GitLaw which state applies and it adjusts the draft.
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