Record special investor terms without losing sight of the wider round

A side letter is often used when one investor wants a specific arrangement that is not being offered across the whole round. That might include extra reporting rights, a board observer role, a founder undertaking, a consent right or a completion condition. It can be useful where the main investment documents are mostly settled, but a separate point still needs to be documented clearly. Rather than leaving that issue in emails or informal discussions, a side letter can record it in a way that is easier to assess against the rest of the transaction.

Sometimes that is the better approach, but not always. If the requested term is only intended to apply to one investor, putting it into the main shareholders or subscription documents can complicate the round or create rights that others may expect as well. A side letter can keep the special arrangement separate, but it still needs to be checked carefully. For example, a bespoke information right or approval right may seem straightforward on its own, yet create tension with governance settings, founder commitments or future investor expectations once the round closes.

Common examples include enhanced information rights, observer access, founder restrictions, milestone-related commitments, follow-on participation expectations and conditions linked to completion. Some side letters also deal with practical matters such as extra reporting, access to certain updates or a specific undertaking from the company or founders. The main legal issue is usually not whether the term can be written down, but whether it fits properly with the cap table, the shareholders agreement and the rights being offered to others in the same round.

Yes. A side letter can cause issues if it gives one investor rights that conflict with the shareholders agreement, duplicate approval mechanics, or create obligations that are hard to manage after completion. For example, a special reporting promise may be easy to agree in principle, but difficult once confidentiality, board processes or future fundraising are considered. A founder undertaking can also have wider consequences if it is inconsistent with existing governance documents. That is why the side letter should be reviewed as part of the round, not treated as a standalone note.

It helps to provide the current draft investment documents, the proposed side letter terms, your cap table and any email trail or marked-up drafts showing what has already been discussed. If the investor is asking for a specific right, it is also useful to explain the commercial reason for it and whether anyone else in the round is receiving something similar. That context makes it easier to assess whether the term belongs in a side letter, needs different wording, or would be better dealt with in the main transaction documents instead.

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