MRL stands for management rights letter. U.S.-based venture capital investors will often ask for an MRL as a condition to closing a financing. Founders will often ask us, "what is an MRL?" and "why does this investor need one?" Below are brief answers to a few commonly asked questions about MRLs.
What is an MRL?
An MRL gives an investor in your company certain rights, specifically, (1) the right to consult with and advise management periodically, (2) the right to examine your company's books and records and inspect its facilities, and (3) sometimes, the right to receive copies of materials sent to your board of directors. It typically is a short letter agreement between the company and a single investor.
(A brief note on terminology: The term "letter agreement" or "side letter" implies a relatively short agreement between two parties – often in connection with a transaction where there are also much longer agreements being entered into among more than two parties. The side letter is used to give special rights to one party, or to modify certain terms of the broader transaction agreements as between the two parties that sign the side letter. An MRL is a very specific type of side letter. If an investor is asking for a side letter, there's a good chance they are asking for a broader set of rights than they would receive under a standard MRL, although sometimes the "MRL-specific" rights are combined within a larger side letter.)
Why do (some) investors need (or want) an MRL?
Often, VC investors will request an MRL due to certain U.S. regulatory requirements that apply to many VC funds. You don't need to understand the nuances of these requirements in great detail, but if you are curious, the National Venture Capital Association (NVCA), which maintains a set of model legal documents for venture financings, has a model MRL that you can download here. The first page of that document summarizes the regulatory requirements that an MRL is intended to satisfy; essentially, these requirements boil down to the VC investor needing to show that it is a "venture capital operating company" or VCOC — which means, among other things, that at least 50% of its assets are invested in "venture capital investments" where the VC investor has contractual rights to participate substantially in, or substantially influence the conduct of, the management of the portfolio company. An MRL is one way to obtain such contractual "management rights."
Even when investors are not subject to the above regulatory requirements, they may still want to enter into an MRL with your company because they want the access and information that a company is obligated to provide under an MRL.
Should I just say yes to any investor in my financing that asks for an MRL?
For VCs and other large institutional investors (especially if they are the lead investor in your financing), it usually makes sense to agree to an MRL (although you should have your attorney review the letter itself, as discussed below). Smaller non-institutional investors are typically not subject to the regulatory requirements that MRLs are meant to address; if this type of investor asks for an MRL, you will want to understand why they have made this request before you say yes or no. Be careful about automatically saying yes to all MRL requests, since that could set a "bad" precedent that even small investors who are not subject to the regulations noted above get access to the type of information and rights covered by an MRL. Talk with your attorney so they can help you consider and evaluate specific MRL requests in light of the transaction and relevant parties involved.
In addition, if your company is a U.S. company (or a non-U.S. company that does business in the U.S.) and the investor is a non-U.S. party (or has non-U.S. owners), then you should discuss that point with your attorney before saying yes, as the rights and information that a U.S. company would typically make available to an investor under an MRL could raise issues under the regulations of the Committee on Foreign Investment in the United States (CFIUS). Read more about CFIUS here.
You will also want to be mindful of the impact to the company down the road if (over the course of multiple financings) you have entered into MRLs with many different investors: make sure to track these MRLs (and other side letters) over time so you are aware of the company's specific obligations to various investors.
Do the terms of MRLs vary or get negotiated much?
It depends. Understanding why a given investor is asking for an MRL is key. MRLs for VC investors tend not to be heavily negotiated, especially when they are on the NVCA's model form and when the investor is asking for the MRL to satisfy their VCOC requirements. However, every investor is unique – the requirements of a given investor in connection with a specific investment will vary depending on several factors, including, for example, the investor's internal and regulatory compliance policies, and requirements of its limited partners. As a result, you should consult with your attorney before you sign an MRL in the form presented by the investor or their attorney. Your attorney can help you navigate whether or not to negotiate changes to any specific MRL requested by an investor. The confidentiality and termination provisions, for example, can have important legal and business implications for the company and may need to be tweaked to better protect the company and/or align more closely with other governing documents.
Similarly, when an investor is asking for an MRL as a "nice to have" (for example, if they are not subject to the regulatory requirements that an MRL is intended to satisfy), there may be more room to negotiate the MRL to reduce the Company's obligations while still providing your investor with many of the rights they want.
Special thanks to Josh Seidenfeld, Elizabeth Reese and Tom Reicher for their contributions to this article.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
