A management rights letter (MRL) is a short side letter that gives one investor contractual rights to consult with and advise your management, inspect your books and facilities, and, if it has no board seat, receive board materials or attend board meetings as a nonvoting observer. Most venture funds ask for one for a regulatory reason: it helps the fund qualify as a “venture capital operating company,” which keeps its assets from being treated as pension plan assets under federal benefits law (ERISA). Sign one for institutional investors, usually on the standard form, and ask why before giving one to an angel.
Key takeaways
- An MRL is a side letter between the company and a single investor, separate from the main financing documents.
- The core rights are to consult and advise, to inspect, and to see board materials or observe board meetings when the investor has no director.
- Funds with large pension plan investors need contractual “management rights” in their portfolio companies to stay outside ERISA’s plan asset rules.
- Accept the standard form from institutional investors. Angels and small funds rarely need one.
- Review the confidentiality, withholding and termination terms, and check with counsel before giving these rights to a non-US investor.
- Keep a log of every MRL and side letter so you know what you owe each investor.
What does an MRL give the investor?
A typical MRL gives the investor three things. First, the right to consult with and advise management on significant business issues, with management agreeing to meet with the investor at reasonable times. Second, the right to examine the company’s books and records, inspect its facilities and request information about its finances and operations. Third, if the investor has no representative on the board, either copies of the materials sent to directors or the right to attend board meetings as a nonvoting observer.
The company can usually withhold information or exclude the investor from part of a meeting to protect attorney-client privilege, to keep trade secrets and highly confidential information confidential, or when the investor has a conflict of interest, such as an investment in a competitor. The rights typically end when the company goes public or is sold, and sometimes when the investor’s holding falls below a stated level. The National Venture Capital Association publishes a model MRL, and most US funds start from it.
An MRL does not give the investor a vote, a veto or a board seat. “Consult and advise” means management has to listen, not follow.
Why does a venture fund need one?
Pension plans are among the largest investors in venture funds. Under the Department of Labor’s plan asset regulation, if benefit plan investors hold 25% or more of any class of equity in a fund, the fund’s own assets can be treated as “plan assets.” That would make the fund’s managers ERISA fiduciaries, subject to strict rules on how they invest and how they’re paid, which no venture fund is set up to follow.
Funds avoid that result by qualifying as a venture capital operating company, or VCOC. To qualify, at least 50% of the fund’s assets, valued at cost, must be invested in operating companies in which the fund holds “management rights”: contractual rights, directly between the fund and the company, to substantially participate in or substantially influence the conduct of management. The fund must also actually exercise those rights with at least one portfolio company each year. A board seat usually supplies them. For investments without a board seat, the MRL does.
That’s why a fund’s counsel will ask for an MRL even on a small check. Each investment without management rights doesn’t count toward the fund’s 50%. Because the test runs across the whole portfolio, most funds treat the MRL as standard closing paperwork rather than a negotiated term. Funds below the 25% threshold don’t need one, though some ask anyway because they want the access.
Should I sign one?
It depends on who’s asking and why.
| Who’s asking | Likely reason | Usual answer |
| Lead venture fund | VCOC compliance | Sign the standard form after your lawyer reviews it |
| Another institutional fund in the round | VCOC compliance | Sign, ideally on the same form as the lead |
| Angel, syndicate or family office | Wants access and information | Ask why; offer regular investor updates instead |
| Corporate or strategic investor | Wants access and information | Narrow it and protect competitively sensitive information |
| Non-US investor | Either | Check foreign investment rules before signing |
For a venture fund, an MRL costs the company very little. It mostly formalizes what a good investor relationship already involves. For individual investors, it’s different. They aren’t subject to the plan asset rules, and giving every small investor inspection and consultation rights multiplies your obligations, spreads confidential information more widely and sets a precedent the next investor will cite. Regular updates usually meet their real need. See How Do I Update Investors in My Startup?
What should I check before signing?
Standard-form MRLs from venture funds aren’t heavily negotiated, but a few terms deserve a look.
Confidentiality. Information the investor receives should be confidential and used only to monitor its investment. It’s reasonable for the fund to share it with its own partners and advisors under the same obligation.
Withholding. Keep the right to withhold privileged material, trade secrets and anything that creates a conflict, and to exclude an observer from those parts of a board meeting.
Termination. The rights should end on an IPO, a sale of the company and, ideally, when the investor sells most of its stake.
Consistency. Make sure the MRL lines up with the information rights and any board observer terms in your other financing documents, so you aren’t promising the same investor different things in two places.
What if the investor is outside the US?
Be careful. If a non-US investor buys into a US business that works with critical technologies, critical infrastructure or sensitive personal data of US citizens, certain rights can bring even a small investment under the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS). Those rights include access to material nonpublic technical information, board membership or observer rights, and involvement in substantive decisions about those technologies or data. An MRL can grant exactly those rights, and some investments in critical technology companies require a mandatory filing before closing. Talk to your lawyer before you sign. The usual fix is to leave technical information access and observer rights out of a foreign investor’s letter.
How do I keep track of MRLs and side letters?
Keep a side letter log: each investor, the date, the rights granted and when they end. Over several rounds, a company can collect a dozen letters with slightly different promises, and the next lead investor or an acquirer will ask for all of them in diligence. A log also tells you who gets board materials and whose consent or notice you need when something changes. See What Comes After Fundraising? and Startup Due Diligence.
For related investor rights, see Pro Rata Rights, Protective Provisions, Series Seed vs NVCA Documents and How Do I Build an Early-Stage Startup Board?
Go deeper: For a full walkthrough, see our Founder’s Guide to Seed Funding and Founder’s Guide to Series A.
If you’d like help with your financing documents, see our Series Seed services, our NVCA Seed and Series A services or contact us.
