MFN Clause

An MFN clause is a contractual provision granting an investor the right to automatically receive any better terms offered to subsequent investors. Also called a "most-favored-nation clause," "most-favored-nations," or "MFN protection," it applies in the same financing round or, in some structures, in future rounds. It is used as protection for early investors who don't want to be disadvantaged versus later investors who negotiate harder or get more favorable structures. It is one of the most commonly granted and least carefully tracked provisions in venture financing, and the source of significant downstream complications when companies forget what they've granted.

The structure: investor signs a Subscription Agreement or side letter with the MFN clause. The clause typically reads something like "if the Company grants any other investor in this offering (or in some structures, in future offerings) any term more favorable than those granted to this Investor, then the Investor will automatically receive the benefit of those more favorable terms." The trigger: when the Company grants any new investor better terms (lower price, additional rights, fee reductions, enhanced protections), the MFN-protected investor automatically gets the same terms without further negotiation. The common use cases:

YC SAFE notes: have built-in MFN provisions that give all YC SAFE holders any better terms granted to subsequent SAFE investors.
Side letters with major early-stage investors: often include MFN protection against later side letters in the same round.
Fund LP side letters: LPs frequently negotiate MFN protection against later LP terms in the same fund.

The structural risk for companies and fund managers: MFN clauses create cascading obligations that are easy to grant individually and painful to manage collectively. Granting Investor B reduced management fees can automatically extend to Investor A if A had earlier MFN protection. The cumulative effect across many MFN-protected investors can erode fund economics significantly. The discipline that helps: maintain a centralized log of every MFN-protected investor and what specific terms each has rights to. Before granting any new term to any investor, check the log to see what cascades will trigger.

Ryan's Take

MFN clauses are the boring contractual provisions that compound into real economic consequences. The protection makes sense from the investor's perspective ("don't give later investors a better deal than mine"); the company-side discipline is making sure every grant is intentional given what cascades will trigger. The trap: a startup grants Investor A an MFN clause in their SAFE, raises a year later from Investor B with slightly better terms, doesn't realize Investor A automatically gets those terms too. Then the next investor grants their own MFN. Then the next. Track these explicitly; the alternative is finding out about the cascade at the worst possible time.

What founders get wrong: Granting MFN clauses without tracking them centrally. Each individual MFN grant seems reasonable; the cumulative stack creates obligations that surface at later financings or fund formations as unexpected complications. Maintain a clear log of every MFN-protected investor and what specific term categories they have rights to.

FAQ

What is an MFN clause?
A contractual provision granting an investor the right to automatically receive any better terms offered to subsequent investors in the same financing round or in future rounds. Used as protection for early investors who don't want to be disadvantaged versus later investors. Most-favored-nation clause.

Where do MFN clauses appear?
In venture financing: YC SAFE notes (built-in MFN), side letters with major early-stage investors, occasional Subscription Agreement provisions. In VC fund formation: LP side letters frequently include MFN protection against later LP terms in the same fund. Anywhere an early party wants protection against later better terms.

What's the risk of granting MFN clauses?
Cascading obligations. Granting one MFN-protected investor a better term automatically extends it to other MFN-protected parties. Without central tracking, founders and fund managers forget what they've granted and trigger unexpected cascades at later rounds or fund formations. Track every MFN grant centrally.

Find this article helpful?

This is just a small sample! Register to unlock our in-depth courses, hundreds of video courses, and a library of playbooks and articles to grow your startup fast. Let us Let us show you!

Submission confirms agreement to our Terms of Service and Privacy Policy.