The short answer
A side letter is a separate agreement between a company and a specific investor that adds rights or terms not in the main investment documents. Common examples are pro rata rights, information rights or a commitment to a board observer seat.
- A side letter adds terms for one investor outside the main contract.
- Y Combinator's pro rata right lives in an optional standardized side letter.
- Side letters can trigger MFN clauses held by others.
- Keep a register so nothing is forgotten at the next round.
How it works
Standard instruments like SAFEs are meant to be simple and identical. When one investor needs something extra, the parties sign a short letter alongside the main document. Y Combinator, for example, keeps the pro rata right in an optional, standardized side letter rather than in the SAFE itself.
Worked example (hypothetical)
A seed fund invests $300K on a SAFE and asks for pro rata rights in your next priced round and quarterly financial updates. Your other SAFE investors, writing $10K to $50K each, get the standard SAFE only. You sign one side letter with the fund covering both requests. At your Series A, your lawyer checks the side-letter register and reserves room in the round for the fund's pro rata.
What to watch for
- MFN clauses held by other investors may let them claim the same rights.
- Rights that outlive conversion, such as information rights, keep obligations running for years.
- Promises to future leads, such as guaranteed allocations, can complicate a later round.
Why it matters to a pre-seed or seed founder
Side letters are normal and useful, but they're easy to lose track of. Keep a simple list of every side letter, its terms and when each right ends. See pro rata rights, information rights and MFN clause.
Frequently asked questions
Are side letters public?
No. They're private contracts between the company and the investor, but they must be disclosed in diligence.
Do side letters survive a priced round?
Some rights end at conversion; others continue. Read each letter's term.
Should every investor get a side letter?
No. Reserve them for investors whose check size or role justifies extra rights.