Side Letters and MFN: What LPs Negotiate Outside the LPA

A side letter is a separate agreement between the fund and one investor that modifies the limited partnership agreement for that investor alone. Common asks include fee reductions for size, co-investment rights, enhanced reporting, excuse rights for particular investments, and notification if a key person departs.

The most-favored-nation clause is what turns individual side letters into a system. It gives an investor the right to elect any term granted to another investor, usually limited to investors of the same or smaller commitment size. Once you have granted one, every subsequent side letter has to be circulated and every eligible LP gets to choose from it.

What LPs Actually Ask For

Requests cluster into a predictable set, and knowing the list lets you decide your position before you are negotiating under time pressure with a first close date approaching.

Fee breaks tied to commitment size — a reduced management fee above $10 million or $25 million is the most common single ask.
Co-investment rights, giving the LP first look at deals larger than the fund can take alone. Valuable to them and usually cheap for you.
Enhanced or accelerated reporting, sometimes monthly rather than quarterly, which is an operational cost your administrator will price.
Excuse rights, letting an LP opt out of investments that conflict with their mandate — common for public pensions, endowments, and religious institutions.
Transfer rights and key-person notification, both of which are usually grantable without much cost.
Regulatory carve-outs for government plans and sovereign entities, which are frequently non-negotiable on their side.

How MFN Actually Works in Practice

After the final close, the GP circulates a schedule of every side letter term to all LPs holding MFN rights. Each eligible LP then elects the terms it wants, typically within 30 days. Tiering is what keeps this manageable: an LP that committed $5 million may elect only terms granted to investors at $5 million or less, while the $25 million anchor can elect anything.

Without tiering, MFN is economically dangerous. Grant a 50 basis point fee reduction to a large anchor investor and an untiered MFN lets every investor in the fund claim it, which can reduce fee income across the entire LP base. This is the single most expensive drafting mistake available in a first fund, and it is invisible until the election period.

Keeping a First Fund Manageable

Every side letter is a permanent operational obligation. An LP with monthly reporting rights needs monthly reporting for 10 years, and your administrator will charge for it. An LP with excuse rights means every investment requires checking whether anyone must be excluded, which changes deal mechanics and the allocation arithmetic.

Practical discipline for a first fund: decide in advance which categories you will grant and which you will not, set a commitment threshold below which you grant no side letter at all, tier the MFN from the outset, and keep a single register of every granted term. Managers who track side letters in email discover at Fund II that they cannot reconstruct what they promised.

Typical Terms

Conventions rather than rules. What matters most is that the MFN is tiered and the obligations are tracked from day one.

Term	Typical range	Notes
MFN election window	30 days	After the final close, once the term schedule is circulated.
MFN tiering	By commitment size	An LP may elect terms granted at or below its own commitment level.
Fee break threshold	$10M – $25M	The commitment size at which a reduced management fee becomes a common ask.
Typical fee reduction	25 – 50 bps	Off the headline management fee for qualifying commitments.
Side letter minimum	$5M+	Set a floor below which no side letter is granted, or you will paper dozens.
Drafting cost	Rarely in a fixed fee	Almost always billed hourly and can exceed the base formation quote.

Typical ranges observed across private funds of this type. Actual terms depend on strategy, track record, and LP negotiation — treat these as orientation, not advice, and confirm your structure with counsel.

Frequently Asked Questions

Do I have to disclose side letters to other LPs?

The LPA and the offering documents should describe that side letters may be granted and on what basis, and an MFN clause requires circulating the actual terms to eligible investors. Granting materially better economics to one investor without disclosure is the kind of conflict that creates real liability. Work the disclosure language through with counsel rather than treating it as boilerplate.

Can I refuse a side letter?

Yes, and for a first fund you should refuse most of them. A commitment threshold below which you grant nothing is a defensible, easily explained policy. The asks worth accommodating are the ones that cost you little — key-person notification, transfer rights, co-investment access — rather than fee economics and operational obligations.

What makes an MFN clause dangerous?

Granting it untiered. If every LP can elect any term granted to any other LP, a single concession to a large anchor propagates across the whole fund. Tier it by commitment size from the first draft. This is the most expensive mistake in the category and it does not surface until the election period after final close.

How many side letters does a typical first fund have?

Anywhere from none to a handful. Funds raised entirely from individuals frequently have zero. Once an institutional investor is involved there will be at least one, and their counsel will arrive with a template. Budget both the legal cost and the ongoing operational obligations before you accept the commitment.

Do side letters affect the waterfall?

They can. A fee reduction changes what the fund collects, and any economic modification has to be reflected in the model and handled by your administrator in the allocation. If you grant differential economics, confirm your administrator can actually implement them before you sign — not every system handles per-investor terms cleanly.

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This guide is educational material, not legal, tax, or investment advice. Fund Launch is not a law firm and does not provide legal advice; fund formation documents prepared on the platform are reviewed by independent counsel before use. Consult your own advisors about your specific situation.