When Investors Require Side Agreements

It has become increasingly common in venture financings for investors to require the company to enter into “side letters” – i.e. separate agreements between the company and one particular investor, which are separate from the main investment documents that are signed by all of the investors. Side letters may provide a particular investor with some unique set of rights (for example, information rights beyond what the other investors are getting), or impose certain additional restrictions on the company’s activities beyond what the rest of the investors require (this sometimes happens when one investor is a bank or financial services company whose investments are heavily regulated).

While many side letters appear to be short and straightforward, they can create unexpected issues for a company in its future transactions and operations, as well as for the investors that are not receiving side letters.

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