Startup founders who are negotiating with venture capital (VC) funds might be asked to sign a management rights letter (MRL). It’s a common arrangement when the fund’s investors include employee benefit plans, and it gives the VC fund certain rights to advise the startup in key ways. It also grants access to company financials and records. The fund might require an MRL to satisfy certain regulatory requirements.

Below, we’ll discuss how an MRL works, when one typically comes up during financing, and the rights for VCs that are often included.

Key takeaways

• A management rights letter (MRL) gives a venture capital (VC) fund certain advisory and informational rights. It doesn’t grant equity, board seats, or voting rights, but it does provide the fund with greater insight into the company than other stockholders get.

• MRLs are common when raising money from VC funds whose investors include employee benefit plans (e.g., corporate or union pension plans). Funds often request an MRL to help them qualify for an exemption from strict federal rules around benefit plan assets.

• An MRL is usually requested and signed when a VC fund first invests in a startup. It’s often presented at closing alongside other financing documents, such as a stock purchase agreement (SPA), investors’ rights agreement (IRA), and voting agreement.

What is a management rights letter?

A management rights letter, or MRL, is generally a standalone agreement between a startup and an individual fund, granting the fund specific advisory and informational rights. An MRL isn’t legally required, but it’s common when raising money from VCs. If a VC fund manages employee benefit plans (e.g., pension plans), an MRL can help it qualify for an exemption from strict federal rules that would limit how the fund operates.

The letter is presented separately from the stock purchase agreement (SPA) and other investment documents. This separation allows the company to sign one MRL with each fund that needs it without having to change the term for other investors. The National Venture Capital Association (NVCA) provides a sample MRL template VCs can adapt to their specific requirements.

Why do VCs request a management rights letter?

The Employee Retirement Income Security Act (ERISA) protects many types of employee benefit plans. Under ERISA rules, if benefit plan investors own 25% or more of a VC fund, the fund’s assets—including its ownership stake in any startups—are treated as benefit plan assets. In this case, fund managers are required to act as fiduciaries and follow strict rules. For example, ERISA doesn’t allow fiduciaries to engage in certain transactions.

However, there is an exception. These rules don’t apply to VC funds that qualify as venture capital operating companies (VCOCs). To qualify, at least 50% of the fund’s assets must be in venture capital (VC) investments. Under the VCOC rules, a startup counts as a VC investment only if the fund holds management rights in it.

An MRL documents those rights. Without a VCOC management rights letter—another name for an MRL—the fund could lose its VCOC status. At that point, the startup would be considered a passive investment and wouldn’t count toward the 50% test for the VC. The fund must also exercise its management rights with at least one of its portfolio companies each year.

What rights are typically covered in a management rights letter?

An MRL typically gives a fund the right to:

• Periodically provide management advice on significant business issues.

• Inspect company facilities.

• Receive copies of materials provided to the board of directors if the investor doesn’t have a board seat.

• Receive operating and financial information about the business.

Depending on the fund and the negotiation, some MRLs might give the fund the right to attend board meetings as a nonvoting observer. These rights are more extensive than those granted to other stockholders, giving the fund more information and insight into the company.

When does an MRL come up during fundraising?

An MRL is usually requested and signed during a fund’s initial investment in a startup. The founders’ counsel typically prepares the MRL and circulates it with the other ancillary documents during the closing, including the following:

• Stock purchase agreement (SPA): This covers how many shares are being issued, the price per share, the startup’s representations about the business, and the conditions to close the deal.

• Investors’ rights agreement (IRA): This includes the fund’s information rights, registration rights, and the right to buy additional shares in future rounds.

• Voting agreement: This sets how investors and founders vote on important matters, including how the board is composed.

How does an MRL fit among other closing documents?

In a typical financing closing, an MRL is presented at closing alongside key closing documents, including the stock purchase agreement (SPA), investors’ rights agreement (IRA), and voting agreement. Startup founders usually prepare and circulate the MRL with these documents, and the MRL isn’t usually negotiated.

Why does an MRL matter even though it’s a smaller document?

While an MRL doesn’t grant equity, board seats, or voting rights, it still matters to investors that rely on the VCOC exemption. If an MRL is missing or improperly executed, the fund might not be able to count that startup toward its VCOC test, which can put the exemption at risk. An MRL is considered standard practice in institutional venture financing. Startup founders can expect the request and be prepared to draft and sign an MRL for each fund.

How Stripe Atlas can help

Stripe Atlas handles everything you need to legally launch your company—incorporation, Employer Identification Number (EIN), equity setup, and tax filings—so you can fundraise, open a bank account, and start accepting payments in as little as two business days, from anywhere in the world.

Join 100,000+ startups incorporated using Atlas, including startups backed by top investors like Y Combinator (YC), a16z, and General Catalyst.

Get started in minutes with Atlas

The application takes under 10 minutes. You’ll choose your company structure, confirm your name is available, add up to four cofounders, set your equity split, and e-sign. Then Atlas takes it from there, including notifying cofounders to sign their documents electronically.

Banking and payments before your EIN arrives

Atlas files your EIN application automatically after incorporation. You don’t have to wait—Atlas enables pre-EIN payments and banking so you can start accepting payments and making transactions right away. US founders with a Social Security number (SSN) are typically eligible for expedited IRS processing.

Automatic 83(b) tax election filing

Atlas files your 83(b) election for you—US and non-US founders alike—with US Postal Service (USPS) certified mail and tracking to reduce personal income taxes. You’ll get a signed 83(b) election and proof of filing directly in your Stripe Dashboard, with certified mail confirmation.

World-class company legal documents

Atlas provides all the legal documents you need to start running your company, drafted by Cooley, one of the world’s leading venture capital law firms, and stores them directly in your Stripe Dashboard. These documents are designed to help you fundraise immediately and ensure your company is legally protected, covering aspects like ownership structure, equity distribution, and tax compliance.

$2,500 in Stripe credits, plus $50K+ in partner discounts

Atlas startups get $2,500 in Stripe product credits for their first year, plus $50,000+ in partner discounts on essential tools like AWS, Google, Xero, Perplexity, and more. Delaware registered agent service is also included free for your first year.

Learn more about how Atlas can help you set up your new business quickly and easily, and get started today.

FAQs about management rights letters