This sample document is the work product of a coalition of attorneys who specialize in venturecapital financings, working under the auspices of the NVCA. See the NVCA website for a list ofthe Working Group members. This document is intended to serve as a starting point only, andshould be tailored to meet your specific requirements. This document should not be construed aslegal advice for any particular facts or circumstances. Note that this sample presents an array of(often mutually exclusive) options with respect to particular deal provisions.MANAGEMENT RIGHTS LETTER Last updated on January 5, 2004Preliminary NoteThe 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 assetshave significant fiduciary duties under ERISA and cannot engage in certain transactionsprohibited by ERISA. If a pension plan covered by ERISA (an “ERISA Plan”) invests in aventure fund, then all of the fund’s assets—such as its investments in portfolio companies—aretreated as assets of the ERISA Plan, absent an exemption. As a result, the trust requirementapplies, the managing partner of the fund is treated as an ERISA fiduciary, and the fund mustcomply with the rules regarding prohibited transactions.The U.S. Department of Labor, which is charged with administering ERISA, hasissued regulations that contain certain exemptions from the plan assets rules. Under oneexemption, a venture fund is not deemed to hold ERISA plan assets if it qualifies as a venturecapital operating company (a “VCOC”). To qualify as a VCOC, the fund must have at least50% of its assets invested in venture capital investments. An investment in a portfolio companyqualifies as a “venture capital investment” if the fund obtains certain management rights withrespect to the portfolio company. “Management rights,” in turn, are defined as contractualrights running directly from the portfolio company to the fund that give the fund the right toparticipate substantially in, or substantially influence the conduct of, the management of theportfolio company. In addition to obtaining management rights, the fund is also required toactually exercise its management rights with respect to one or more of its portfolio companiesevery year.In order to build a case for an exemption from the ERISA Plan asset rules, a venturefund will generally ask each of its portfolio companies to sign a management rights letter inconnection with the fund’s initial investment. An example of such a letter follows.Last updated on December 12, 2003 i[PORTFOLIO COMPANY LETTERHEAD][Investor]Re: Management RightsLadies and Gentlemen:This letter will confirm our agreement that pursuant to and effective as of your purchaseof [________] shares of Series [_] Preferred Stock of [_____________________] (the“Company”), [Investor Name] (the “Investor”) shall be entitled to the following contractualmanagement rights, in addition to any rights to non-public financial information, inspectionrights, and other rights specifically provided to all investors in the current financing:1. If Investor is not represented on Company’s Board of Directors, Investor shall beentitled to consult with and advise management of the Company on significant business issues,including management’s proposed annual operating plans, and management will meet withInvestor regularly during each year at the Company’s facilities at mutually agreeable times forsuch consultation and advice and to review progress in achieving said plans.2. Investor may examine the books and records of the Company and inspect itsfacilities and may request information at reasonable times and intervals concerning the generalstatus of the Company’s financial condition and operations, provided that access to highlyconfidential proprietary information and facilities need not be provided.3. If Investor is not represented on the Company’s Board of Directors, the Companyshall, concurrently with delivery to the Board of Directors, give a representative of Investorcopies of all notices, minutes, consents and other material that the Company provides to itsdirectors, except that the representative may be excluded from access to any material or meetingor portion thereof if the Board of Directors determines in good faith, upon advice of counsel, thatsuch exclusion is reasonably necessary to preserve the attorney-client privilege, to protect highlyconfidential proprietary information, or for other similar reasons. Upon reasonable notice and ata scheduled meeting of the Board or such other time, if any, as the Board may determine in itssole discretion, such representative may address the Board with respect to Investor’s concernsregarding significant business issues facing the Company.Investor agrees that any confidential information provided to or learned by it inconnection with its rights under this letter shall be subject to the confidentiality provisions setforth in that certain Investors’ Rights Agreement of even date herewith by and among theCompany, the Investor and other investors.1 1If for some reason the Investor is not a party to the Investors’ Rights Agreement, you will need to copy theconfidentiality provisions from the Investors’ Rights Agreement here.Last updated on December 12, 2003The 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) theconsummation of the sale of the Company’s securities pursuant to a registration statement filedby the Company under the Securities Act of 1933, as amended, in connection with the firmcommitment underwritten offering of its securities to the general public or (c) the consummationof a merger or consolidation of the Company that is effected (i) for independent business reasonsunrelated to extinguishing such rights and (ii) for purposes other than (A) the reincorporation ofthe Company in a different state or (B) the formation of a holding company that will be ownedexclusively by the Company’s stockholders and will hold all of the outstanding shares of capitalstock of the Company’s successor. The confidentiality obligations referenced
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