Side Letters in Dutch Venture Financing Rounds

MFN, pro rata, information and consent rights outside the main investment documents

Side letters are common in professional venture financing rounds. They allow one investor to receive specific rights outside the main investment agreement and shareholders’ agreement.

That can be useful. A fund may need additional reporting. A strategic investor may need transfer restrictions. A bridge investor may ask for MFN protection. A major investor may want pro rata rights, observer access or enhanced information rights.

But in Dutch venture financings, side letters must be managed carefully. They create an additional layer next to the investment agreement, shareholders’ agreement, articles of association and cap table. If that layer is not controlled, it can create conflicts in governance, follow-on financings, exit planning and future due diligence.

This article is part of ViottaLaw’s Dutch VC Insights and connects to implementing US-style VC terms in Dutch venture financings, Dutch implementation of US-style investor rights and US VC Terms & Dutch BV Structures.

Why investors ask for side letters

Investors request side letters for different reasons. Some rights are specific to a particular fund mandate. Others relate to internal reporting, regulatory status, tax, ESG, confidentiality, transfer restrictions or co-investment rights.

Side letters may also be used to bridge syndicate dynamics. A lead investor may negotiate the main documents, while a co-investor asks for specific reporting or MFN rights. A strategic investor may require confidentiality restrictions. A previous bridge investor may want assurance that it is not disadvantaged in the next round.

For founders and companies, side letters may help close a financing without reopening the entire shareholders’ agreement. But the side letter must not undermine the core governance package.

Common side letter rights

Typical side letter rights include MFN clauses, pro rata participation rights, additional information rights, ESG or reporting undertakings, transfer rights, observer rights, fee arrangements, confidentiality undertakings and limited consent rights.

Not every right belongs in a side letter. Rights that affect share issuance, transfers, class rights, voting, reserved matters, drag-along, tag-along or exit distribution may need to be reflected in the shareholders’ agreement or articles of association.

The legal question is not whether the investor can have the right. The question is where the right should sit and whether it is consistent with the Dutch document architecture.

Hierarchy with the articles and shareholders’ agreement

The key issue is hierarchy.

What happens if a side letter conflicts with the shareholders’ agreement? What if the articles of association prescribe a different process? Can one investor receive a side right that affects the rights of other investors?

The side letter should include clear conflict language. It should not silently override the articles or collective shareholders’ agreement. If a right affects other shareholders or the company’s governance, it may need broader approval or inclusion in the main documents.

For international counsel, this is an important Dutch implementation point. The side letter may be contractual, but the Dutch BV’s corporate mechanics are still governed by the articles, shareholder resolutions and applicable Dutch corporate law.

MFN and pro rata rights

MFN rights are often used in bridge rounds, convertible instruments and side letters. They give an investor the ability to benefit from better rights granted to another investor in a later instrument or round.

The problem is that MFN rights can complicate future financings. A new lead investor may negotiate a specific protection package, only for earlier investors to claim the same rights.

Pro rata rights can also create complexity. They allow an investor to participate in future rounds, often to maintain ownership. In a Dutch BV, these rights should be coordinated with statutory or articles-based pre-emption rights, contractual participation rights, pay-to-play mechanics and new investor allocations.

For founders and lead investors, the key is modeling. What happens in a Series A, bridge round, down round or extension round if all side letter rights are exercised?

Information rights and board autonomy

Additional information rights are common, but they should be precise. The company should know what must be provided, when, in what format and to whom.

A startup cannot realistically maintain multiple bespoke reporting packages for every investor. The side letter should therefore distinguish between major investor reporting and individual special requests.

Consent rights are more sensitive. If a single investor receives a veto outside the shareholders’ agreement, governance can become fragmented. In a Dutch BV, the board also has its own statutory responsibilities and should not be reduced to an execution vehicle for individual investor instructions.

Consent rights in side letters should therefore be limited, specific and consistent with the reserved matters framework in the main documents.

Transferability, term and termination

A side letter should state whether rights are transferable, whether they survive a transfer of shares, whether they apply to affiliates and when they terminate.

Without sunset language, old side letters can remain buried in the cap table and reappear during due diligence for a future round or exit.

This is why a side-letter register is useful. It should track investor, date, rights, duration, transferability, termination events, conflicts and whether the rights fall away below a minimum ownership threshold.

For professional deal teams, this is not administrative hygiene. It protects future financing and exit readiness.

Practical conclusion

Side letters can be useful in Dutch venture financing rounds, but they should not create a hidden governance regime.

Each side right should be tested against the investment agreement, shareholders’ agreement, articles of association, cap table and future financing plan. Rights that affect all shareholders should usually be in the main documents. Individual rights should be narrow, documented and tracked.

FAQ

Are side letters enforceable in Dutch venture financings?

They can be, provided they meet normal contractual requirements and do not conflict with mandatory rules or corporate mechanics.

Can a side letter override the shareholders’ agreement?

Only if properly drafted and agreed by the relevant parties. In practice, conflict and hierarchy provisions are essential.

Do other investors need to know about side letters?

Not always in full detail, but rights that affect governance, future rounds or exits should be transparent enough to avoid later disputes.

What is an MFN clause?

A most-favored-nation clause gives an investor access to certain better rights granted to another investor in a later instrument or financing.

Should side letters survive the next financing round?

Only if intended. The side letter should state whether rights expire, roll over or need to be renegotiated in the next round.

About Dirk de Waard

Dirk de Waard is a Dutch corporate, M&A and venture capital lawyer and partner at Venture Lawyers in Amsterdam. He advises founders, startups, scale-ups, angels, VC funds, growth investors and international counsel on Dutch venture financings, side letters, investor rights, shareholders’ agreements, articles of association and governance.

ViottaLaw is Dirk’s personal insights platform. Legal services are provided through Venture Lawyers.

Need a side letter hierarchy check?

A side letter should fit within the investment agreement, shareholders’ agreement, articles of association and cap table.

Dirk de Waard advises founders, investors and international counsel on side letters and investor rights in Dutch venture financing rounds. Contact Dirk at dirk.dewaard@viottalaw.com to review the side-letter structure before closing.