A side letter is a separate agreement granting a specific investor terms or rights different from those given to other investors in the same round. Also used between a VC fund and one of its LPs, side letters accommodate investor-specific requirements such as enhanced information rights, lower fees, tax-related representations for tax-exempt investors, restrictions on certain investment activities, or other bespoke provisions, without modifying the main financing documents that apply to all investors. Side letters are the mechanism by which differentiated investor relationships get formalized while keeping the primary deal documents uniform.
The common uses in venture financing: