Fund Structure
What is a side letter?
Quick Answer
A side letter is a separate agreement between a fund and a specific LP granting special terms — such as reduced fees, co-investment rights, advisory committee seats, or most-favored-nation provisions — beyond the standard LPA terms.
Detailed Answer
Side letters are individual agreements between a GP and specific LPs that modify the standard fund terms (LPA) for that particular investor.
Common side letter provisions:
**Economic:** - Reduced management fees (e.g., 1.5% instead of 2%) - Reduced carried interest (e.g., 15% instead of 20%) - Fee offsets or waivers - Co-investment rights (direct access to deals alongside the fund)
**Governance:** - LPAC (LP Advisory Committee) seat - Enhanced reporting requirements - Consent rights on certain fund actions
**Regulatory/Compliance:** - Excuse rights (opt out of specific investments for regulatory reasons) - ERISA compliance provisions - Tax-related provisions for non-US LPs
**Information:** - Enhanced transparency and reporting - Portfolio company data access - Annual meeting attendance rights
Most-Favored-Nation (MFN): The most important side letter provision. An MFN clause guarantees that if any other LP receives better terms, the MFN holder can elect to receive those same terms.
Who gets side letters: - Large LPs ($10M+ commitments) have the most leverage - Anchor investors (first close) often receive the best terms - Institutional LPs (pensions, endowments) may require specific regulatory provisions
Founder relevance: Side letters don't directly affect portfolio companies, but they influence fund economics and LP relationships.
Related Questions
What is venture capital?
Venture capital is a form of private equity financing where investors provide capital to early-stage, high-growth startups in exchange for equity ownership, typically expecting 10x+ returns over 7-10 years.
How do venture capitalists make money?
VCs make money through two streams: management fees (typically 2% of fund size annually, covering operating costs) and carried interest (typically 20% of fund profits above a hurdle rate, which is where real wealth is built).
What is carried interest in venture capital?
Carried interest (carry) is the share of investment profits — typically 20% — that fund managers (GPs) earn as performance-based compensation after returning LP capital plus a preferred return (usually 8%).
How do you raise a venture capital fund?
Raising a VC fund involves establishing a legal entity (LP structure), defining your thesis and target fund size, building a track record, creating fundraising materials (PPM, pitch deck), and securing commitments from LPs over 6-18 months.