In connection with the issuance of a SAFE or a financing round, venture capital funds will request a management rights letter (MRL). An MRL is an agreement between the company and an investor which provides the investor with the ability to participate in, or substantially influence the conduct of, the management of the company.
The MRL enables venture funds to remain exempt from Employee Retirement Income Security Act of 1974 (ERISA), which are federal regulations that can be restrictive and onerous to comply with. The NVCA has a form MRL that some funds use while other funds have their own version of the MRL. Although the request for a MRL is common in SAFE financings, founders should ensure that investors don’t sneak additional rights into the MRL, which were not negotiated for and are not necessary to qualify for an exemption under ERISA.
The NVCA form of the MRL provides the investor with several rights, each of which can be negotiated. However, the more rights present in the MRL, the more likely that the MRL will satisfy the requirements necessary for exemption under ERISA.
The MRL will also make clear that the investor agrees to keep confidential any information provided, or learned in connection with, the rights granted in the MRL. The rights granted in the MRL typically terminate upon the earliest of: (i) such time as the investor owns no capital stock of the company, (ii) an IPO, (iii) an acquisition.