Legal & Compliance
Side Letter
Last updated
Quick Answer
A supplemental agreement between a GP and specific LP granting customized terms beyond the standard LPA, such as fee discounts, enhanced reporting, or co-investment rights.
A Side Letter is a supplemental agreement between a fund's GP and a specific LP that grants that LP customized terms that differ from or supplement the standard Limited Partnership Agreement. Side letters are negotiated individually with large or strategically important LPs who have leverage to request preferential treatment. Common side letter provisions include: management fee reductions or rebates, enhanced co-investment rights, additional reporting requirements, most-favored-nation (MFN) clauses ensuring the LP receives the best terms granted to any other LP, excuse rights (allowing the LP to opt out of investments that conflict with their policies), restrictions on the fund investing in certain industries (tobacco, gambling, weapons), and early notification of key events. MFN clauses are particularly powerful—an LP with MFN rights can elect to adopt any favorable term from any other LP's side letter, effectively creating a race to the most LP-friendly terms. Side letters are confidential between the GP and the specific LP, though MFN provisions create indirect transparency.
In Practice
A pension fund committing $75 million (the largest LP in a $200 million fund) negotiates a side letter with the following provisions: a 25 basis point fee reduction (1.75% instead of 2%), quarterly in-person portfolio reviews, an MFN clause, the right to opt out of investments in companies involved in fossil fuels or private prisons, and co-investment rights on all deals above $10 million. The MFN clause means this LP can also adopt any more favorable terms that any other LP negotiates in their own side letters.
Why It Matters
Side letters are the mechanism through which large LPs extract preferential economics and governance rights. GPs should be strategic about side letter concessions—granting too many MFN-eligible provisions can cascade across the LP base, eroding economics. LPs without side letters effectively subsidize those with them, as fee discounts reduce the overall fee pool.
Further Reading
Emerging Manager Playbook: Raising Your First Fund in 2026
The complete playbook for first-time fund managers. Legal formation, LP targeting, fundraising timeline, and the mistakes that kill first funds.
VentureKit vs Hiring a Lawyer vs Fund Admin: Which Path Is Right for Your Fund?
Emerging managers face a critical early decision: spend $50K+ on lawyers and fund admins, or use modern tooling to get your fund off the ground fast. Here's the honest breakdown.
LP Data Room Best Practices: What to Include When Raising Your Fund
A practical guide for emerging managers on exactly what to include in an LP data room, how to structure it, which platforms to use, and the mistakes that quietly kill a fundraise.
Side Letter Best Practices for Emerging Managers: What to Grant and What to Avoid
A practical guide to VC side letters for emerging managers: what they are, which provisions are standard, how MFN clauses really work, what to push back on, and how to avoid the most common mistakes that can haunt a fund for its entire life.
How to Write an Investment Memo: The VC Template That Actually Works
A practical, partner-ready guide to writing VC investment memos that actually drive decisions: structure, examples, common mistakes, and how top firms like Sequoia, a16z, and Benchmark do it.
LP Data Room Checklist: Everything Your Fund Needs (2026)
The complete checklist of every document your LP data room needs — organized by category, with notes on what institutional LPs actually review and what signals professionalism.
Careers That Use This Term
This concept is especially relevant for these venture capital roles:
Frequently Asked Questions
What is Side Letter in venture capital?
A Side Letter is a supplemental agreement between a fund's GP and a specific LP that grants that LP customized terms that differ from or supplement the standard Limited Partnership Agreement.
Why is Side Letter important for startups?
Understanding Side Letter is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
What category does Side Letter fall under in VC?
Side Letter falls under the legal category in venture capital. This area covers concepts related to the legal frameworks and compliance requirements in venture capital.
Newsletter
The VC Beast Brief
Join thousands of founders and investors. Every Tuesday.
The VC Beast Brief
Master VC terminology
Get smarter about venture capital every week. Our newsletter breaks down the terms, concepts, and strategies that matter.
VentureKit
Ready to launch your fund?