FAQS
An investor is requesting the Company enter into a Side Letter with them as a condition of their investment. Should we give it to them?
- Financing
- Preferred Stock
A Side Letter Agreement is a separate agreement between the Company and an investor, usually entered into alongside a debt or equity financing. Unlike a Stock Purchase Agreement, Investors' Rights Agreement and other standard financing documents that are signed by all investors in a financing, a Side Letter is specific to a single investor and gives rights that might not be given to other investors.
Typical Side Letters may include:
- Board observer rights;
- The right to participate pro-rata in future financings; and/or
- Access to certain financial and operational information of the Company, such as financial reports, on a regular basis (these "information rights" are often required by Venture Capital firms for regulatory compliance purposes).
Side Letters are often used by SAFE or Convertible Promissory Note investors to obtain some of the rights typically given to Preferred Stockholders.
Less commonly, Side Letters may grant investors the right to approve or veto certain company actions, such as a sale of the Company.
If the Company is accepting money from a strategic investor, a Side Letter may also contain terms outlining a commercial arrangement between the investor and the Company, often granting the investor some exclusive right to use Company technology.
Founders should consult with legal counsel and carefully weigh the costs and benefits before agreeing to any Side Letter. On the one hand, the additional rights in a Side Letter can entice an investor who may otherwise decline to invest. On the other hand, Companies may face pressure from other investors to give out similar Side Letter rights or to terminate existing Side Letters to keep all stockholders on similar footing.
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