NVCA Management Rights Letter Reviewer Checklist

29 C.F.R. § 2510.3-101(d)(3)(ii) defines management rights as direct contractual participation or influence rights.

(ii) The term “management rights” means contractual rights directly between the investor and an operating company to substantially participate in, or substantially influence the conduct of, the management of the operating company.

See 29 C.F.R. § 2510.3-101(d)(3)(ii)

29 C.F.R. § 2510.3-101(d)(1) specifies that the VCOC test combines its asset, timing and actual-exercise conditions.

(1) An entity is a “venture capital operating company” for the period beginning on an initial valuation date described in paragraph (d)(5)(i) and ending on the last day of the first “annual valuation period” described in paragraph (d)(5)(ii) (in the case of an entity that is not a venture capital operating company immediately before the determination) or for the 12 month period following the expiration of an “annual valuation period” described in paragraph (d)(5)(ii) (in the case of an entity that is a venture capital operating company immediately before the determination) if— (i) On such initial valuation date, or at any time within such annual valuation period, at least 50 percent of its assets (other than short-term investments pending long-term commitment or distribution to investors), valued at cost, are invested in venture capital investments described in paragraph (d)(3)(i) or derivative investments described in paragraph (d)(4); and (ii) During such 12 month period (or during the period beginning on the initial valuation date and ending on the last day of the first annual valuation period), the entity, in the ordinary course of its business, actually exercises management rights of the kind described in paragraph (d)(3)(ii) with respect to one or more of the operating companies in which it invests.

See 29 C.F.R. § 2510.3-101(d)(1)

NVCA Management Rights Letter paragraph 0 ties the rights to the identified preferred-stock purchase.

This letter will confirm our agreement that pursuant to and effective as of your purchase of [________] shares of Series [_] Preferred Stock of [_____________________] (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:

See paragraph 0

NVCA Management Rights Letter paragraph 1 specifies that the optional consultation right depends on absence of board representation and mutually agreeable meeting times.

[If Investor is not represented on Company’s Board of Directors, Investor shall be entitled to consult with and advise management of the Company on significant business issues, including management’s proposed annual operating plans, and management will meet with Investor regularly during each year at the Company’s facilities at mutually agreeable times for such consultation and advice and to review progress in achieving said plans.]

See paragraph 1

NVCA Management Rights Letter paragraph 2 specifies that the optional inspection right preserves a highly confidential proprietary information and facilities exception.

[Investor may examine the books and records of the Company and inspect its facilities and may request information at reasonable times and intervals concerning the general status of the Company’s financial condition and operations, provided that access to highly confidential proprietary information and facilities need not be provided.]

See paragraph 2

NVCA Management Rights Letter paragraph 3 conditions board-material delivery and permits specified counsel-advised exclusions.

[If Investor is not represented on the Company’s Board of Directors, the Company shall, concurrently with delivery to the Board of Directors, give a representative of Investor copies of all notices, minutes, consents and other material that the Company provides to its directors, except that the representative may be excluded from access to any material or meeting or portion thereof if the Board of Directors determines in good faith, upon advice of counsel, that such exclusion is reasonably necessary to preserve the attorney-client privilege, to protect highly confidential proprietary information, or for other similar reasons.

See paragraph 3

NVCA Management Rights Letter paragraph 3 specifies that the representative’s right to address the board has notice and scheduling conditions.

Upon reasonable notice and at a scheduled meeting of the Board or such other time, if any, as the Board may determine in its sole discretion, such representative may address the Board with respect to Investor’s concerns regarding significant business issues facing the Company.]

See paragraph 3

NVCA Management Rights Letter paragraph 4 specifies that the optional restriction limits the specified rights arising solely from this letter.

[Notwithstanding anything to the contrary in this letter agreement, solely by reason of becoming party to this letter agreement, Investor will not obtain with respect to the Company, and the Company will not provide to Investor, any of the following rights, as defined in Section 721 of the Defense Production Act, as amended, including its implementing regulations: (a) “control” of the Company, including the power to determine, direct or decide any important matters affecting the Company; (b) membership or observer rights on the Board of Directors or equivalent body of the Company, or the right to nominate an individual to a position on the Board of Directors or equivalent body of the Company; (c) access to any “material nonpublic technical information” in the possession of the Company [(provided, however, that such prohibited information shall not include financial information regarding the performance of the Company, and provided further that Investor may confer with the Company about such financial information)]; and (d) any “involvement” (other than through voting of shares) in “substantive decision making” of the Company regarding (i) the use, development, acquisition, safekeeping, or release of “sensitive personal data” of U.S. citizens maintained or collected by the Company, (ii) the use, development, acquisition, or release of “critical technologies,” or (iii) the management, operation, manufacture, or supply of “covered investment critical infrastructure.”

See paragraph 4

31 C.F.R. § 800.232(b) specifies that the material-nonpublic-technical-information definition excludes financial-performance information.

(b) The term material nonpublic technical information does not include financial information regarding the performance of an entity.

See 31 C.F.R. § 800.232(b)

NVCA Management Rights Letter recommends counsel review before affected foreign funds choose access restrictions.

Because of the inherent tension between the CFIUS and ERISA regimes in this context, Foreign funds with known ERISA concerns should consult counsel before deciding what language to include and exclude in this agreement.

See NVCA Management Rights Letter (July 2020), footnote 4.

NVCA Management Rights Letter paragraph 5 applies the referenced Investors’ Rights Agreement confidentiality terms.

Investor agrees that any confidential information provided to or learned by it in connection with its rights under this letter shall be subject to the confidentiality provisions set forth in that certain Investors’ Rights Agreement of even date herewith by and among the Company, the Investor and other investors.

See paragraph 5

NVCA Management Rights Letter recommends copying confidentiality provisions if the investor is not an IRA party.

If for some reason the Investor is not a party to the Investors’ Rights Agreement, you will need to copy the confidentiality provisions from the Investors’ Rights Agreement here.

See footnote 5

NVCA Management Rights Letter paragraph 6 specifies that its termination events retain stated transaction conditions and confidentiality survival.

The rights described herein shall terminate and be of no further force or effect upon (a) such time as no shares of the Company’s stock are held by the Investor or its affiliates; (b) the consummation of the sale of the Company’s securities pursuant to a registration statement filed by the Company under the Securities Act of 1933, as amended, in connection with the firm commitment underwritten offering of its securities to the general public; or (c) the consummation of a merger or consolidation of the Company [(x)] that is effected (i) for independent business reasons unrelated to extinguishing such rights; and (ii) for purposes other than (A) the reincorporation of the Company in a different state; or (B) the formation of a holding company that will be owned exclusively by the Company’s stockholders and will hold all of the outstanding shares of capital stock of the Company’s successor and [(y) in which the successor entity provides reasonably comparable rights to the Investor or the consideration payable to the Investor in such transaction consists solely of cash or securities of a class listed on a national exchange]. The confidentiality obligations referenced herein will survive any such termination.

See paragraph 6

NVCA Management Rights Letter paragraph 0 specifies that the introductory agreement identifies the company, investor and effective purchase.

This letter will confirm our agreement that pursuant to and effective as of your purchase of [________] shares of Series [_] Preferred Stock of [_____________________] (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:

See paragraph 0