VC & PE Glossary
What Is Related-Party Transaction?
Updated
Definition
A related-party transaction is any deal between a company and an insider — founder, executive, director, or controlling shareholder — or an entity they control, where conflicts of interest must be managed through disclosure and approval.
Useful for: Founders, Investors
A related-party transaction is a commercial arrangement between a company and a party with close ties to its management or control group — creating potential self-dealing.
How it works
Transactions include loans to founders, shared services agreements, IP licenses from founder-owned entities, and customer contracts with VC portfolio affiliates. Companies disclose them in board materials, financial statement footnotes, and /glossary/reps-and-warranties schedules in financings. /glossary/related-party-approval from disinterested directors validates fairness.
Acquirers scrutinize related-party revenue — it may not recur post-sale. Cleanup often means terminating affiliate contracts and renegotiating at market rates before close.
Why it matters
- Founders: Keep related-party deals minimal and documented; opacity kills trust faster than the dollars involved.
- Investors: Related-party noise signals governance immaturity or financial engineering.
- Auditors: Public readiness requires clean related-party policies and recurring disclosure.
Common mistake
Routing personal expenses or friends’ contracts through the company without disclosure. Diligence treats omission as integrity risk, not paperwork.
Related ideas
/glossary/related-party-approval, /glossary/reps-and-warranties, conflict of interest, and disclosure schedules.
Related terms
- Related Party Approval — Related party approval is board or stockholder sign-off required before a company enters a transaction with insiders, directors, major shareholders, or their affiliates — ensuring conflicts are disclosed and terms are fair to the company.
- Reps and Warranties — Reps and warranties (representations and warranties) are factual statements and promises in a purchase or financing agreement — about cap table, contracts, litigation, IP, and compliance — that if wrong give the other party indemnity or termination rights.
Common questions
Short answers for founders, LPs, and operators