Side Letter
A separate agreement granting specific investors special terms beyond the main deal documents.
Definition
A side letter is a private agreement between the company and a specific investor that grants special terms not included in the main investment documents. Side letters might grant additional information rights, special anti-dilution protections, advisory board seats, co-investment rights, or MFN clauses. They are negotiated individually and other investors may not know their contents.
Why it matters
Side letters can create hidden obligations and preferential treatment for certain investors. If a major investor has a side letter with special liquidation rights, it could affect how exit proceeds are distributed, potentially reducing what common holders receive.
Example
A strategic corporate investor signs the standard Series B documents but also gets a side letter granting them: ROFR on any acquisition offers, an observer seat on the board, and a right to invest up to $10M in the next round on the same terms.