
Dan Brecher
Counsel
212-286-0747 dbrecher@sh-law.comFirm Insights
Author: Dan Brecher
Date: December 3, 2020
Counsel
212-286-0747 dbrecher@sh-law.comSide letters are frequently used to enter into legal agreements between private funds and investors. They can be used to alter the terms of a limited partnership agreement or even override certain provisions. While side letters can be helpful in securing key investments, it is imperative to fully understand their legal implications. The discussion below can also be applied to capital funding for any start-up and for operating businesses doing subsequent equity raises or debt funding rounds.
A side letter is an agreement between the fund and one specific investor that changes terms of the limited partnership agreement with regard to that one investor. In some cases, the side letters are necessary for the investor to proceed with the transaction. In other cases, they are a tool for the investor to negotiate a more favorable deal.
Side letters have been increasingly used in connection with early stage formation funding. They are often needed to satisfy last minute requests, usually on the day or day before a scheduled closing pursuant to last minute thoughts or realizations by a marquee investor, a strategic investor, employees, or friends and family. They are also utilized to satisfy the requests of limited partners to accommodate subsequent closings without amending the limited partnership agreement.
These side letter negotiations often get into topics such as fee limitations, rights of transfer of the securities being issued, excusal rights, rights of redemption and notice of redemptions by other investors. They may also address a number of other additional representations and warranties by the issuer that others may not have, such as due diligence or record and premises inspection rights, and more frequent and more detailed reporting obligations of the issuer to this investor.
Before agreeing to a request for a side letter, it is important to understand the advantages and disadvantages. The obvious advantage is that the investor will proceed with the investment. In many cases, investors request side letters just prior to closing, and, therefore, it can be tempting to acquiesce without fully weighing the risks. However, there are several issues to consider:
Given the potential pitfalls, it is important to review any request for a side letter with legal counsel. An experienced attorney can help you negotiate a side letter that best serves your interests and protects your legal rights. Of course, it is equally important that all agreements to amend the terms of the limited partnership agreement are memorialized in writing and signed by both parties. Management of all entities, fund managers, CEO’s and proprietors alike, should be careful to abide by disclosure requirements for any material changes that affect investors’ rights that are reflected in the side letter.
If you have any questions or if you would like to discuss these issues further,
please contact Dan Brecher or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
If you’re considering closing your business, it’s crucial to understand that simply shutting your doors does not end your legal obligations. Unless you formally dissolve your business, it continues to exist in the eyes of the law—leaving you exposed to ongoing liabilities such as taxes, compliance violations, and potential lawsuits. Dissolving a business can seem […]
Author: Christopher D. Warren
Contrary to what many people think, corporate restructuring isn’t all doom and gloom. Revamping a company’s organizational structure, corporate hierarchy, or operations procedures can help keep your business competitive. This is particularly true during challenging times. Corporate restructuring plays a critical role in modern business strategy. It helps companies adapt quickly to market changes. Following […]
Author: Dan Brecher
Cryptocurrency intimidates most people. The reason is straightforward. People fear what they do not understand. When confusion sets in, the common reaction is either to ignore the subject entirely or to mistrust it. For years, that is exactly how most of the public and even many in law enforcement treated cryptocurrency. However, such apprehension changed […]
Author: Bryce S. Robins
Using chattel paper to obtain a security interest in personal property is a powerful tool. It can ensure lenders have a legal claim on collateral ranging from inventory to intellectual property. To reduce risk and protect your legal rights, businesses and lenders should understand the legal framework. This framework governs the creation, sale, and enforcement […]
Author: Dan Brecher
For years, digital assets operated in a legal gray area, a frontier where innovation outpaced the reach of regulators and law enforcement. In this early “Wild West” phase of finance, crypto startups thrived under minimal oversight. That era, however, is coming to an end. The importance of crypto compliance has become paramount as cryptocurrency has […]
Author: Bryce S. Robins
Earlier this month, the U.S. Supreme Court issued a decision in Ames v. Ohio Department of Youth Services vitiating the so-called “background circumstances” test required by half of federal circuit courts.1 The background circumstances test required majority group plaintiffs pleading discrimination under Title VII of the Civil Rights Act to meet a heightened pleading standard […]
Author: Matthew F. Mimnaugh
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!