What is a side letter?
A side letter is a separate agreement giving one party — typically an investor — rights or accommodations beyond the main transaction documents: extra reporting, co-investment rights, fee discounts in funds; board observation, information rights or regulatory covenants in startup rounds. It binds like any contract; its defining feature is simply that the other investors do not sign it.
Where it is legitimate — and where it leaks
Funds use side letters routinely for LP-specific regulatory needs (sanctions, ESG reporting, sovereign privileges). In startup rounds they cover investor-specific mechanics that would clutter the SHA. The leak points are two. MFN clauses: many investors hold most-favoured-nation rights that entitle them to any better term granted to others — a quiet side letter can thus propagate to the whole cap table, or breach the MFN if concealed. And corporate-law limits: rights that belong in the articles (vetoes, share privileges) do not become effective against the company or third parties merely by side letter; in Turkish A.Ş. practice, a side letter is a contractual promise enforceable between its parties, not a shareholder right erga omnes.
Housekeeping that prevents disputes
Keep a side-letter register; check each new letter against existing MFN and equal-treatment commitments; mirror company-side obligations into internal task owners (a reporting promise nobody operationalises is a slow-burning breach); and disclose the stack in diligence — undisclosed side letters are a classic red flag that reprices trust.
Do side letters survive the next round?
Only if drafted to — most are superseded or must be re-signed; investors who care negotiate express survival or reissue at each closing.
Are side letters enforceable against the company?
If the company signs, yes, as a contract — but structural rights still require the articles or the SHA to bind organs and future shareholders.
Related: MFN clause, information rights.