TLDR:
A side letter is a separate agreement between a company and a specific investor that modifies or supplements the standard terms of a financing agreement, typically granting additional rights or protections to that investor.
Side Letter Risks and Management
Side letters create significant governance and investor relations risks when not carefully managed. If multiple investors negotiate different side letter terms, a company can end up with conflicting obligations or terms that inadvertently trigger most-favored-nation (MFN) provisions in other investors’ agreements, requiring all investors to receive the best terms granted to any single investor. Large cap tables with many side letters become particularly complex to manage, as each new financing round must check for potential MFN triggers across all existing agreements.