Most Favored Nation Clause Definition
A Most Favored Nation (MFN) clause is a contractual provision that guarantees an investor receives terms no less favorable than those offered to other investors during the same funding round or within a specified timeframe. If a company negotiates better terms with another investor, the MFN clause automatically adjusts the original investor's terms to match those superior conditions.
Why It Matters for Angel Investors
Angel investors often face uncertainty about the terms other investors receive in early-stage funding rounds. An MFN clause provides protection by ensuring you don't get disadvantaged if the company later offers more favorable conditions to subsequent investors. This is particularly valuable when you invest early and take on higher risk, as you're protected against having your stake diluted disproportionately.
Common Applications
MFN clauses typically cover:
- Valuation caps in convertible notes or SAFEs
- Discount rates on future equity conversions
- Liquidation preferences and payment priorities
- Governance rights and board seat allocation
- Anti-dilution protections
Practical Example
Suppose you invest $50,000 in a startup with a $5 million valuation cap on a convertible note. Two months later, the company raises another round at a $4 million valuation cap. An MFN clause would automatically adjust your investment to reflect the better $4 million cap, improving your conversion terms when the note eventually converts to equity.
Potential Limitations
While protective, MFN clauses can complicate negotiations and may cause friction between early and later investors. Some founders resist them, viewing them as overly restrictive. Additionally, MFN clauses sometimes exclude certain types of investments or specified time periods.
Related Terms
Convertible Notes | Valuation Cap | SAFE Agreement | Anti-Dilution Protection | Liquidation Preference