Why does Most Favored Nation (MFN) Clause matter?
It protects an early check in a round from being undercut by a better deal given to a later investor in the same bridge or SAFE, but it also constrains a founder's later negotiating flexibility, offering one investor a lower cap or better terms to close out a round automatically extends that same improvement to every earlier MFN-holding investor in the round, a cost easy to forget when trying to close the last few checks on more generous terms.
What does Most Favored Nation (MFN) Clause look like in practice?
Suppose a company raises a $1,500,000 SAFE bridge, with early investors signing at a $10,000,000 cap with MFN protection. To close out the round, the last $300,000 is raised at an $8,000,000 cap from a new investor. Because the earlier investors hold MFN rights, their SAFEs automatically reprice down to the same $8,000,000 cap given to the last-in investor, what looked like a small concession to close the round actually improved every earlier investor's terms too, increasing total dilution across the entire round.
What are the common mistakes with Most Favored Nation (MFN) Clause?
- Offering better terms to close out the final part of a round without accounting for how MFN clauses extend that same improvement to every earlier investor who holds one.
- Not tracking which investors in a round actually hold MFN rights and which do not, leading to under-modeled dilution when the clause triggers.
- Assuming MFN protection only compares terms within the exact same instrument type, when some clauses are drafted broadly enough to reach across different instruments in the same financing period.
- Treating MFN as a minor boilerplate protection rather than negotiating its scope as carefully as the cap itself.
Where the term comes from
The most-favored-nation principle has roots in trade diplomacy. America's first trade treaty, the 1778 Franco-American Treaty of Amity and Commerce, carried only a conditional MFN clause. The unconditional version, where any advantage granted to one party extends automatically to all, became the organising rule of world trade when GATT took effect on 1 January 1948.
Encyclopedia.com, most-favored-nation clause ↗Related concepts
- SAFEs and Convertible NotesTwo instruments that let an investor put money in now and receive equity later, at a price set when a future priced round happens, instead of negotiating a valuation today.
- Valuation Cap and DiscountThe two mechanisms that determine how favorably an early investor's SAFE or note converts into equity relative to the price new investors pay in the priced round that triggers conversion.
- Bridge RoundA smaller, faster round, usually structured as a SAFE or convertible note, raised to extend a company's runway to the next milestone or the next full round, rather than to fund years of growth.