What are information rights?
August 10, 2007
Information rights force a company to provide investors with financial statements and other company information. These rights are typically contained in an Investor Rights Agreement.
A typical information rights provision from a term sheet provides:
The Company will deliver to each holder of at least [500,000] shares of Preferred, (i) [un]audited annual financial statements within  days following year-end, (ii) unaudited quarterly financial statements within  days following quarter-end, (iii) unaudited monthly financial statements within  days of month-end, and (iv) annual business plans. The information rights will terminate upon an initial public offering.
Most information rights also include the opportunity to visit the company’s facilities, inspect the company’s books and records and discuss matters with company officers. As a practical matter, I don’t think that most venture backed companies are in 100% compliance with information rights provisions, especially the time periods for delivery of the information. For example, audited financial statements for private companies never seem to be completed within the specified time period.
One issue that gets negotiated in the information rights provision are the number of shares that an investor needs to hold to receive information rights. This concept of “major investor” is often used to limit the investors that receive preemptive rights and rights of first refusal and co-sale (to be covered in future posts). The number of shares is typically set low enough to ensure that the smallest venture fund (or significant angel) in a syndicate receives information rights and high enough to avoid giving rights to numerous small investors. In addition, companies may wish to avoid commiting to delivering annual business plans or monthly financial statements
Information rights provisions also contain provisions that ensure that investors keep the information confidential. This is important because directors have a fiduciary duty to keep company information confidential, but investors do not have a similar obligation absent a contractual confidentiality provision.