Side Letter

A side letter is a separate written agreement that sits alongside a main contract and modifies or supplements it for one particular party, without changing the document everyone else signed. It is most familiar in private funds — venture capital, private equity, hedge funds — where a fund raises money from many limited partners (LPs) under one standard set of documents, and individual investors negotiate their own tweaks on the side. A large or early investor might secure a fee discount, a capacity guarantee, extra reporting, a co-investment right, or a most-favored-nation clause promising it the best terms any other LP receives. Rather than reopening the main agreement for each negotiation, the fund captures these bespoke commitments in a side letter binding just that investor and the fund. The main documents stay uniform; the customization lives beside them.

The appeal of the side letter is that it lets a single deal accommodate different parties without fragmenting into dozens of versions of the core contract. An anchor investor who commits early and large has real leverage and wants terms reflecting it; the fund wants that commitment without publishing special treatment to everyone. A side letter resolves the tension privately and precisely. But side letters carry weight equal to the main agreement — they are binding contracts, not informal notes — so their promises must be honored and tracked. As they accumulate across a fund's investor base, they create a web of individual obligations that the fund has to manage carefully, because a commitment buried in one LP's side letter can constrain how the fund treats all the others.

A side letter differs from the main agreement in scope and reach. The main agreement — a fund's limited partnership agreement, or a contract's principal document — binds all the parties to it on common terms. A side letter binds only the fund and the one investor who signed it, layering personal terms on top. So the main document is the shared rulebook and the side letter is a private annex to it. Crucially, a side letter can override the main agreement for its party where the two conflict, provided it is drafted to do so, which is why they must be read together to know what actually governs a given investor. Reading the main documents alone can give a misleadingly uniform picture of a fund's obligations.

A side letter also differs from a formal amendment. An amendment changes the main agreement itself, altering the terms for everyone bound by it. A side letter leaves the main agreement untouched and simply grants exceptions or additions to a single party, so other investors are unaffected and, often, unaware. That is the practical value — bespoke treatment without a collective renegotiation — and also the risk, because obligations get scattered across many private documents rather than centralized in one. A most-favored-nation clause in one side letter complicates this further, since it can pull terms granted to a later investor back to an earlier one. Managing a fund therefore means treating the whole stack of side letters as part of the governing terms, not as afterthoughts to the main agreement.

Using side letters well means treating them as first-class parts of the deal, not casual accommodations. Each one should be drafted with the same care as the main agreement, clearly stating which of its terms prevail over the standard documents and which merely add to them. A fund should keep a central register of every side letter and its commitments, because obligations promised privately are easy to lose track of and expensive to breach. Most-favored-nation provisions need particular attention, since granting a strong term to one investor can ripple across everyone holding an MFN right. For an investor, a side letter is the place to lock in the protections and rights that justified the commitment, so the negotiation deserves real diligence rather than boilerplate acceptance.

The failures come from treating side letters loosely. Granting inconsistent terms across investors without tracking them creates conflicts a fund cannot honor simultaneously. Forgetting a promised right — a reporting frequency, a fee cap, a co-investment slot — turns a binding commitment into a breach. Overlooking how a most-favored-nation clause chains terms together lets a concession to one LP silently upgrade others. And reading the main agreement in isolation, as if it were the whole deal, misstates what actually governs. The discipline is to draft side letters precisely, register and honor every one, model the interactions between them, and always read the main documents and the side letters together, because the real terms of the relationship are the sum of both. This is not legal advice.

A side letter — a supplemental agreement granting one party bespoke terms beside a main contract — is a fixture of private funds, where individual limited partners negotiate tailored rights without rewriting the shared documents.

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