A Guide to Side Letters

At a Glance

• Side letters are supplemental agreements that provide specific investors with customized terms that sit outside standard fund or investment documents.

• In venture, side letters are common between fund managers and LPs (for economics, reporting, and transfer rights) and between VCs and companies (for rights such as information, pro rata, or ROFR).

• While side letters can make relationships more flexible and tailored, they also increase legal complexity, operational overhead, and compliance risk.

• Sydecar enables flexibility through built-in carry and fee settings at the LP level, allowing managers to tailor economics without drafting separate side letters in most cases.

• This approach helps managers preserve personalization and alignment with LPs while keeping onboarding, recordkeeping, and administration standardized and scalable.

What Is a Side Letter?

In venture capital, a side letter is a separate written agreement that supplements the main transaction documents. It typically exists alongside:

• A fund’s limited partnership agreement (LPA) or limited liability company agreement (LLCA) and subscription documents, or

• A company’s primary financing documents (e.g., stock purchase agreement, investor rights agreement).

The purpose of a side letter is to provide one party—usually an investor—with additional or modified rights that do not apply uniformly to all investors. These rights are almost always advantageous to the investor and can be:

• Economic (fees, carried interest, or participation terms).

• Structural (transfer rights, liquidity provisions).

• Informational or governance-related (reporting cadence, notice rights, or consent rights).

Because side letters create exceptions to standard terms, they require careful drafting and operational tracking.

Side Letters Between Fund Managers and LPs

Side letters between general partners (GPs) and limited partners (LPs) allow both sides to customize how a particular LP participates in a fund or SPV.

Common topics include:

• Fee and carry adjustments

  • Reduced management fees or carry for anchor LPs or early committers

  • Different economics for strategic investors, fund-of-funds, or long-term partners

• Reporting and transparency

  • More frequent or tailored reporting windows

  • Additional portfolio or risk disclosures

  • Custom formats or metrics required by institutional LPs

• Defaults, transfers, and liquidity

  • Modified remedies for late capital calls or temporary defaults

  • Flexibility around assignment or transfer of interests to affiliates or related entities

  • Specific redemption or liquidity accommodations, where appropriate

• Regulatory and policy requirements

  • Provisions tied to an LP’s internal or regulatory obligations (for example, ESG policies, conflict-of-interest procedures, or sanctions-compliance language).

Used thoughtfully, LP side letters can make a fund more accessible and aligned with different investor types. However, they also require the GP to:

• Track which LP has which rights.

• Ensure operational systems reflect those differences.

• Coordinate with counsel to avoid conflicts with the main fund documents.

Side Letters Between VCs and Companies

Side letters are also used between investors and portfolio companies, often in connection with priced rounds or larger checks.

In this context, side letters can address “advanced rights” such as:

• Pro rata rights or enhanced participation rights in future rounds.

• Information rights that go beyond what is in standard investor rights agreements (for example, more detailed financials or more frequent updates).

• Right of first refusal (ROFR) or co-sale rights on secondary transfers.

• Special notice provisions, such as early notice of financing events or material transactions.

Sometimes, side letters are used when:

• A specific term does not fit cleanly in the main financing documents for all investors.

• A lead or significant investor requires additional assurances or reporting.

Because these rights can affect future fundraising, founder dilution, and internal governance, companies and investors should ensure that side letters are consistent with the broader cap table and investor base. Overuse of bespoke rights can create complexity for later rounds.

Why Side Letters Have Become More Common

Side letters have become more prevalent as venture markets and investor bases have diversified. Managers and companies are working with:

• A broader mix of LPs (family offices, fund-of-funds, institutions, individuals).

• Investors with different regulatory regimes and policy requirements.

• LPs with different minimums, fees sensitivities, and reporting needs.

Side letters can make it easier to:

• Admit investors who need tailored terms to participate.

• Offer differentiated economics to strategic or anchor LPs.

• Accommodate institution-specific compliance requests without rewriting the core LPA or LLCA.

However, every side letter is effectively another custom contract to manage, which increases:

• Legal cost to draft, review, and negotiate.

• Operational burden to track who has which rights.

• Risk of inconsistency or conflicts across agreements if not handled carefully.

Tradeoffs: Flexibility vs. Complexity

While side letters can be useful, they are not always the most efficient tool for flexibility.

Benefits:

• Tailored economics and rights for key investors.

• Ability to accommodate unique institutional or regulatory needs.

• Potential to close investors who would otherwise be unable to commit.

Risks and costs:

• Additional legal fees and negotiation time.

• Ongoing administrative complexity—particularly for multi-vehicle managers.

• Potential for uneven treatment and perceived unfairness among investors.

• Higher risk of errors if rights are not accurately reflected in systems and workflows.

For emerging managers and syndicate leads, a small number of heavily customized side letters can quickly become a disproportionate operational burden.

Key Takeaways for Emerging Managers

When considering side letters in your fund or SPV:

1. Start with a strong standard structure. Many needs can be met through well-designed core documents and platform configuration.

2. Reserve side letters for truly exceptional cases. Use them when an investor’s requirements cannot be handled via existing economics or standard terms.

3. Be intentional about fairness and signaling. Understand how bespoke terms might be perceived by other LPs or investors.

4. Plan for operations, not just closing. Ensure your systems and admin partners can track and honor any bespoke rights you grant.

5. Leverage infrastructure that bakes in flexibility. Platforms like Sydecar can handle variable fees and carry natively, reducing the need for one-off side letter solutions.

With the right mix of standardized documents, thoughtful exceptions, and robust infrastructure, emerging managers can offer flexibility to key investors while keeping their funds and SPVs administratively manageable and compliant at scale.