Side Letters Explained: What You Need To Know Before Signing

If you’re raising capital, signing a major customer deal, onboarding a key supplier, or negotiating with a strategic partner, you may come across a document called a side letter.

Side letters can look harmless. They’re often short, written in plain language, and framed as “just confirming what we discussed”. But in practice, a side letter can quietly change the commercial deal, create extra obligations, or even override parts of your main agreement.

For startups and small businesses, the risk is usually not that a side letter exists - it’s that you sign one without fully understanding what it does, how it interacts with your main contract, and who it binds. The good news is: with the right approach, side letters can be a useful tool to get a deal over the line while keeping your main contract clean and consistent.

Below, we’ll walk you through what a side letter is, when it’s used, what to watch out for, and how to protect your business before you sign.

What Is a Side Letter (And Why Is It Used)?

A side letter is a separate written agreement that sits alongside an existing contract (or is signed at the same time as the main contract). It typically records additional terms, clarifications, exceptions, or special arrangements that one party wants documented, without rewriting the main agreement.

Side letters are common in commercial deals because they can be:

• Fast: easier than renegotiating and reissuing the whole contract
• Flexible: you can tailor them to a specific scenario or party
• Practical: they can “bridge the gap” when parties agree on most things but need a few extra commitments

Are Side Letters Legally Binding?

Often, yes. A side letter can be legally binding if it has the usual elements of a contract (for example: clear terms, agreement/acceptance, and intention to create legal relations). It does not need to be long or “formal” to carry legal consequences.

It’s also common for a side letter to say something like “this letter forms part of the agreement” or “the parties agree as follows”. Wording like that usually signals that the document is intended to be enforceable.

Side Letter vs Amendment vs Variation: What’s the Difference?

People sometimes use these terms interchangeably, but they don’t always mean the same thing:

• Side letter: a separate document that adds to or clarifies the deal (and may or may not be disclosed to others, depending on the arrangement).
• Deed of variation / contract amendment: a formal change to the main contract, usually signed by all parties to that contract.
• Informal “email confirmation”: risky. Depending on the contract terms and the circumstances, an email can sometimes still be treated as a binding change (for example, where the contract allows variations in writing and the email is clear and accepted). However, many contracts require variations to be made in a particular way (such as a written document signed by both parties), which can make email “changes” ineffective - or at least disputed.

From a risk perspective, the key question isn’t what the document is called - it’s what the document does.

Common Scenarios Where Startups See Side Letters

If you’re a founder or small business owner, you’re most likely to see a side letter in a few recurring contexts.

1. Investment And Capital Raising

In funding rounds, investors may ask for special rights that don’t appear in the standard investment documents. A side letter might cover things like:

• information rights (extra reporting)
• board observer rights
• follow-on investment rights
• commitments around future financing
• founder obligations (for example, a requirement that a founder remains employed for a period)

This is where side letters can get especially tricky, because you may also have multiple stakeholders and existing governance documents (like a Shareholders Agreement) that interact with what you’re promising in the side letter.

2. Enterprise Customers And “Special Terms”

Large customers may ask for extra commitments that sit outside your standard terms - for example, a bespoke service level, custom reporting, or a special pricing arrangement. Side letters are often used to confirm these without rewriting a master services agreement.

If you offer services online or have standard customer terms, it’s common for your baseline deal to sit in a Service Agreement, with the side letter adding specific items for that customer.

3. Supplier And Distribution Arrangements

You might agree to special rebates, exclusivity, marketing support, or a revised delivery timeline. A supplier may push for a side letter that “confirms” those points.

Be careful here - side letters can accidentally create commitments you can’t meet, or change how price adjustments work over time.

4. Confidentiality, Announcements And PR

Sometimes parties want confidentiality terms that go beyond the main contract, or they want a clear rule about who can announce the deal and how. A side letter can set this out in a way that is operationally easy for both parties.

Depending on the scenario, a standalone confidentiality arrangement (like a Non-Disclosure Agreement) may be more appropriate than a side letter - especially if you want clean separation between confidentiality and commercial performance obligations.

Key Legal Risks With Side Letters (And Why They Catch Businesses Out)

The biggest problem with a side letter is not that it exists - it’s that it can create hidden legal consequences if it is inconsistent with your main contract or your internal policies.

Here are the main risk areas we see for startups and small businesses.

1. The Side Letter Conflicts With The Main Contract

If the side letter contradicts the main agreement, you need to know which document “wins”. Sometimes the main contract has an order of precedence clause. Sometimes the side letter says it overrides the contract. Sometimes neither document is clear, which creates ambiguity (and disputes later).

For example, your main agreement might limit liability, but your side letter might promise a refund or credit beyond what the main agreement allows. Or your main agreement might say “no exclusivity”, while the side letter says “we’ll be your exclusive provider in Australia for 12 months”.

When there’s a conflict, you can end up with:

• uncertain enforceability
• unexpected exposure (for example, higher liability)
• commercial misunderstandings that escalate into disputes

2. You Accidentally Create Ongoing Obligations

Side letters often focus on a small point - pricing, reporting, service levels - but they can create ongoing operational commitments. If you’re moving fast (as most startups are), those commitments can become hard to comply with.

Common examples include:

• monthly reporting obligations that take significant time
• custom support response times that require extra staff
• pricing “favours” that become unprofitable as you scale

Even if the side letter feels small, it can change the economics of the deal.

3. Confidential Side Letters Can Create Governance Problems

Some side letters are intentionally not shared widely (for example, in investor contexts). The problem is that your company still needs to comply with its commitments.

If the founders sign something that impacts company decision-making, future funding rounds, or shareholder rights, it may need to be handled consistently with your existing governance framework (including your constitution, board approvals, and shareholder approvals where required).

If your company operates under a Company Constitution, you’ll want to check whether the side letter creates obligations that should be approved or documented differently.

4. “Informal” Side Letters Can Still Be Enforceable

Sometimes the document is literally a letter or email that says “we confirm you’ll have a 30-day termination right” or “we’ll waive the minimum spend requirement”. If the main contract allows for this kind of change (or doesn’t prohibit it), and the message is clear and accepted, it may be enforceable even if it doesn’t look like a traditional contract.

This is why it’s important to treat any written “confirmation” as potentially contractual - and ensure your team knows when to escalate something for legal review. It’s also why “no variation except in writing signed by both parties” clauses matter: if your contract has one, a side letter (or email) needs to comply with it to avoid dispute about whether the change is effective.

5. Side Letters Can Undermine Your Standard Terms

Many small businesses build scalable contracts so they can onboard customers and partners efficiently. If you start issuing side letters frequently, you can end up with a patchwork of exceptions that’s hard to administer.

That can create:

• internal confusion (your team isn’t sure what applies to which customer)
• unequal treatment issues (other customers may demand the same “special deal”)
• higher dispute risk (because the commercial reality doesn’t match the paperwork)

What To Check Before You Sign a Side Letter

If a side letter lands in your inbox and you’re tempted to sign quickly to keep momentum, it’s worth slowing down and checking a few essentials first. These checks can help you avoid signing something that creates more risk than the deal is worth.

1. Does The Side Letter Clearly Identify The Main Agreement?

A well-drafted side letter should clearly reference the main agreement it relates to (including the date and the correct parties). If the parties are wrong - for example, the side letter names your trading name rather than your legal entity - enforcement becomes messy.

2. Who Are The Parties (And Who Is Actually Bound)?

Make sure the side letter is being signed by the right entity. This matters for startups that have:

• a holding company and an operating company
• different entities for IP ownership and service delivery
• founders signing personally vs signing on behalf of the company

It’s also important to confirm whether the side letter binds only the two signing parties, or whether it creates obligations that affect other stakeholders (like other shareholders or customers).

3. Is It Consistent With The Main Contract (Or Does It Override It)?

Look for wording like:

• “If there is any inconsistency…”
• “This letter prevails…”
• “This letter forms part of…”

If the side letter is intended to override the main contract, it should say so clearly, and the main contract should allow for that kind of change (for example, through a written variation process). If the main agreement includes a “no variation except signed writing” clause, make sure the side letter is executed in the required way.

4. Are The Obligations Measurable And Practical?

Side letters often include promises that sound reasonable but are vague. Vague obligations create dispute risk because each party may interpret them differently.

For example:

• “priority support” (what does “priority” mean?)
• “best price” (best compared to what?)
• “regular reporting” (how often and in what format?)

Where possible, push for objective, measurable commitments (timeframes, defined deliverables, clear triggers).

5. Does It Create Any “Most Favoured” Pricing Or Terms?

Sometimes a side letter gives a customer or investor special pricing or special rights. That’s not necessarily a problem - but it can become one if you later need to offer better terms to win a new deal.

Even worse, some side letters include language that effectively creates a “most favoured nation” arrangement (for example, “you’ll never give anyone better pricing than us”). This can restrict growth and complicate future sales.

6. How Does It End?

Founders often focus on what a side letter gives today, but the more important question is what happens later. Make sure you understand:

• the start date and end date (if any)
• termination rights (and what happens on termination)
• whether obligations survive termination (for example, confidentiality or repayment obligations)

7. Does It Affect Your Compliance Obligations?

Side letters can change how you deliver your goods/services, what you promise customers, and how you handle issues. That can affect compliance with the Australian Consumer Law (ACL), privacy laws, and marketing rules.

For example, if a side letter promises a specific performance outcome, you need to ensure your advertising and customer communications remain accurate and not misleading. Misleading or deceptive conduct can arise from what you promise, not just what’s in your main contract.

Best Practice: How To Use Side Letters Without Creating a Mess

Side letters aren’t inherently “bad”. In the right circumstances, they can be a smart way to close deals. The key is making sure they’re used intentionally and consistently.

Keep Side Letters Narrow And Specific

A side letter should usually be limited to the specific points that need tailoring. If it starts looking like a full re-write of the contract, it may be cleaner to do an amendment or re-issue the agreement.

Use Clear Document Control Internally

If you sign side letters, make sure your team can actually find them and apply them. Practical steps include:

• storing side letters with the main agreement in your contract system
• updating your internal “deal summary” so operations and finance know what was agreed
• assigning responsibility for compliance (for example, who sends reports, who manages SLAs)

This is where small businesses often get caught out: the side letter is signed by the founder, then forgotten, then later treated as a breach when obligations aren’t met.

Be Careful With Confidential Side Letters

If confidentiality is requested, be clear about what is confidential and why. Also consider the practical reality: your finance team, board, co-founders, or operations staff may need to know about obligations to comply with them.

Confidentiality should never stop your business from being able to operate the deal properly.

Don’t Let Side Letters Replace Core Legal Documents

Side letters are best used as “add-ons”, not substitutes for your main contract suite. For example:

• If you’re collecting personal information through your website or app, you’ll still generally need a proper Privacy Policy.
• If you have multiple founders or investors, governance arrangements are usually better handled in a shareholders agreement rather than scattered across side letters.
• If the side letter is really about changing payment terms, deliverables, or service scope, it may be cleaner to update the main agreement or statement of work.

Get The Signing Right

Side letters can be executed in different ways (including electronic signing), but the signing mechanics still matter. If your main agreement requires variations to be signed by authorised signatories, your side letter should align with that.

Also check that the person signing has authority to bind the company (and whether the counterparty is expecting a specific execution method). Some parties may assume signing under section 127 of the Corporations Act, but that isn’t always available or correctly applied in practice (for example, depending on director/secretary appointments and how the document is signed). If you’re unsure what execution approach is appropriate for your business, it’s worth checking before you sign.

Key Takeaways

• A side letter is a separate agreement that sits alongside a main contract and can add, clarify, or change what the parties have agreed.
• Side letters are often legally binding, even if they look informal or “quick”.
• The biggest risks are conflicts with the main contract, creating ongoing obligations you can’t meet, and introducing “special terms” that undermine your standard agreements.
• Before signing, check how the side letter interacts with the main agreement, whether the obligations are practical and measurable, and what happens when the relationship ends.
• Used carefully, side letters can help you close deals - but they should be controlled, documented, and consistent with your broader legal and governance framework.

If you’d like help reviewing or drafting a side letter for your startup or small business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.