What it means
A company raises funding under a common set of investment documents, and one institutional investor asks for additional reporting to meet its own requirements. Rather than rewrite all investor agreements, the parties may sign a side letter for that investor.
Morse explains investor side letters in venture financings, including information rights and management-rights requests, and Dechert discusses private-fund side letters with negotiated terms for particular investors, so these are examples from different transaction contexts, not a single standard form. A side letter should identify the parties and the main agreement it supplements, referring to the correct date and version, because if several similar contracts exist an ambiguous cross-reference can make compliance difficult.
State the specific right or obligation clearly, since 'Investor receives extra information' leaves open content, timing, format and confidentiality, and name the reports, delivery dates, eligible recipients and any termination conditions. Fee terms need the same care: a lower management fee should say the base, start date and whether the discount continues after a transfer, and should avoid a formula that sounds simple but lacks a defined investment amount.
An illustrative annual fee difference is the main rate minus discounted rate, multiplied by the applicable fee base, so 2% less 1.5% on $10,000,000 is $50,000, though the actual fee base and period are contract-specific. Check consistency with the main documents, because a side letter may intentionally override a clause between its parties but should not accidentally contradict a shareholder agreement or fund governing terms, and local counsel can identify priority and approval requirements.
Consider whether other parties have most-favoured-nation rights, since in some funds an investor can elect eligible terms granted through another side letter. Confidentiality is not absolute, as a manager may need to disclose a term to staff who implement it, auditors, regulators or other investors where required, so the audience rules should be drafted with those duties in mind.
Operational ownership matters: a letter promising monthly figures needs an owner in finance and a calendar, not only a signature stored by legal, because an untracked obligation is easy to breach while everyone thinks the standard agreement controls. Create a register of signed side letters that tracks counterparty, main agreement, special rights, recurring deadlines, responsible team, expiry and relevant confidentiality limits.
Review transfer and exit events, since a right granted to a named investor may end if it sells its stake or falls below a threshold, or it may be assignable, and confidential board information should not keep going to a former holder without checking. Board observer or consent rights can affect governance: a right to receive board papers is not the same as a director seat, and a veto over a financing can alter future decisions, so model those consequences before accepting seemingly small wording.
Not all side letters are for investors, because a customer, supplier or lender might agree a narrow exception outside the standard contract, and the same control issue applies: make the relationship to the primary agreement clear and track who must perform. A proposed side letter is not effective merely because someone requested it, so check approval authority, signatures and any condition precedent, and sales or investor-relations staff should not act as though a requested right was granted before execution.
If a later amendment to the main contract is signed, review the side letter at the same time, since the amendment might make a bespoke term redundant or create a new conflict, and keep version history noting which obligations remain active; a periodic compliance check can sample reports delivered, discounts applied and approvals obtained. For an owner, the side letter is a way to tailor a deal without changing all counterparties' documents, and its convenience depends on precise drafting and a reliable way to remember the extra promises later.
In practice
Real-world examples.
Example
One investor receives an additional monthly financial report under a signed side letter. The letter names the report, the delivery deadline and the finance team member responsible. The monthly deadline goes into the finance calendar so that it is not missed.
Example
A fund agrees a specified fee discount for a qualifying investor. The side letter states the fee base, the start date and whether the discount survives a transfer. Finance applies the lower rate in each quarterly invoice and notes the reason on the invoice record.
Example
A special consent right is checked against the main shareholder agreement. Counsel confirms which document prevails if the two conflict and whether other shareholders must approve the arrangement. The company signs only after the priority clause is settled.
Formula
Calculation
Illustrative annual fee difference = (main rate - special rate) x defined fee base.
Worked example with fictional figures. A fund charges a main management fee of 2% and agrees a special rate of 1.5% for one investor whose defined fee base is $10,000,000. The annual difference is (2% - 1.5%) x $10,000,000 = 0.5% x $10,000,000 = $50,000. Over a five-year commitment, that is $50,000 x 5 = $250,000 in fees not collected from this investor.
Now add a most-favoured-nation clause. If two other investors with the same $10,000,000 fee base are entitled to elect the same 1.5% rate, the annual cost grows to 3 x $50,000 = $150,000. The manager should therefore price the first side letter with the clause's wider effect in mind.Case study
Seen in the real world.
This entirely fictional example follows Oasis Capital, an invented fund. It signed several investor letters but tracked only standard reporting dates. A missed bespoke report exposed the gap. The manager built a register with owners and dates and reviewed other rights.
The example does not imply every side letter can be shared with every investor or that a register cures a prior breach. In the example, the fund had signed five letters, and the review found seven separate recurring deadlines that nobody had in a calendar, including a monthly report for one investor and a quarterly fee rebate calculation for another. The fictional manager gave each deadline a named owner and a reminder two weeks ahead. It also reviewed whether a most-favoured-nation clause in the main documents gave other investors a claim to the same fee terms, and took legal advice before answering any request.
Watch out
Common mistakes.
- Signing special reporting rights without assigning a delivery owner.
- Ignoring most-favoured-nation or conflict clauses in the main documents.
- Assuming a requested but unsigned side letter has already changed the deal.
Questions
People also ask.
What is a side letter?
A separate agreement that adds or tailors terms for identified parties alongside a main deal.
Where is it common?
Common in investment funds, financing rounds and other transactions needing a special term.
What is the risk?
Untracked duties, conflicting wording and rights that affect other counterparties or future deals.
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