Most Favored Nation Clauses in Private Fund Side Letters: Why Big LPs Get Them and Retail Investors Don't

TL;DR: A Most Favored Nation clause lets a large LP swap into better terms that another investor negotiated in the same fund. According to Reuters, the Fifth Circuit vacated the SEC's entire 2023 Private Fund Adviser Rule on June 5, 2024, killing the disclosure regime that would have shown every investor what preferential terms existed. MFN rights are still real. They are just not something regulators guarantee you. They are something you negotiate, and negotiating power tracks check size almost exactly.

If you write a $250,000 check into a venture fund through a feeder vehicle, you almost certainly do not have a side letter. If you do not have a side letter, you have nothing to run an MFN election against. According to Reuters, the appeals court's decision removed the last regulatory mechanism that might have forced general partners to tell smaller investors what the biggest checks in the fund were getting. That mechanism is gone now. What is left is a private negotiation between a GP and whoever has enough capital to walk. I want to be direct about what this means in practice, because most explanations of MFN clauses stop at the mechanics and skip the access question entirely. A clause that exists on paper but that you cannot invoke because you were never offered a side letter is not a protection. It is a feature of the fund's documents that describes a right other people have. Understanding the difference between having an MFN right and merely reading about one in a fund's limited partnership agreement is the whole point of this article.

What an MFN Clause Actually Does

A side letter is a private contract between a limited partner and the general partner that sits alongside the main fund documents and modifies specific terms for that one LP. Side letters cover things like reduced management fees, lower carry, enhanced reporting, co-investment priority, and excuse rights on certain deals. According to Carta, these agreements are standard practice in venture and private equity funds, and the largest LPs in a fund typically negotiate one as a condition of committing capital at all. The Most Favored Nation clause is the mechanism that keeps side letters from becoming a game of who negotiated hardest in isolation. It gives an LP the right to review the terms other investors received and elect to receive any of those terms for itself, usually within a defined class of similarly sized commitments. Without an MFN clause, LP #4 might negotiate a fee break that LP #7 never finds out about. With one, LP #7 can demand the same break, provided LP #7's side letter contains the MFN provision and provided LP #7 actually exercises it.

That last point matters more than people assume. An MFN clause is not self-executing. Per the Morgan Lewis VC/PE Funds Deskbook, MFN election windows commonly run about 30 days after final close. The GP circulates a disclosure schedule showing which provisions exist across the side letter population, sometimes anonymized, sometimes not, and the LP has a defined period to pick which ones it wants to adopt. Miss the window, and you are locked into whatever you originally signed. This is a right you have to actively exercise, on a clock, based on a document the GP controls the format of. It is not a standing guarantee that terms equalize automatically.

Tiered Rights: The Part Nobody Puts in the Pitch Deck

Most funds do not run a single MFN pool. They run tiers. A $50 million commitment sits in a different MFN class than a $2 million commitment, which sits in a different class than a $250,000 allocation routed through a feeder fund or a special purpose vehicle. The anchor LPs, often pension funds, sovereign wealth funds, or fund-of-funds with decades of relationship history, negotiate the broadest MFN rights: access to nearly every term in every side letter above a certain size threshold. Mid-sized institutional LPs get a narrower slice, usually MFN rights against other LPs in their own commitment band. Retail-adjacent accredited investors, the kind writing checks in the low six figures through a platform or a feeder, typically get no side letter and therefore no MFN clause to invoke in the first place. This is not an oversight. It is the deliberate architecture of how funds raise capital. A GP raising a $500 million vehicle needs the $50 million anchor to close the fund. That anchor has leverage the GP cannot refuse. The $250,000 check does not close the fund by itself, and the GP knows a hundred other investors want that allocation slot if this one balks at standard terms. The side letter, and the MFN clause inside it, is a function of how much the GP needs your capital relative to how many other people want your seat.

The SEC Tried to Fix This, Then a Court Killed the Fix

The SEC's 2023 Private Fund Adviser Rule was, among other things, an attempt to force sunlight onto exactly this asymmetry. One piece of the rule, the preferential treatment provision, would have required private fund advisers to disclose specified types of preferential terms to all investors in the fund, including terms around redemption rights, information rights, and yes, MFN-style side letter provisions, regardless of whether the recipient had the negotiating position to ask for them. It would not have banned tiered access outright, but it would have made the tiers visible to everyone in the fund, not just the parties who happened to be in the room when the term sheet was drafted. That never happened. According to the Paul Weiss client memo on the case, the Fifth Circuit ruled unanimously, 3-0, in National Association of Private Fund Managers v. SEC, No. 23-60471, that the SEC lacked statutory authority to adopt the rule at all. The court did not just strike the preferential treatment section. It vacated the entire rule, covering quarterly statements, mandatory annual audits, restrictions on certain fee and expense allocations, and the adviser-led secondary transaction requirements along with it. The SEC's own data undercut its case. Per the Paul Weiss memo, the agency's rulemaking record showed misconduct findings in roughly 0.05% of private fund advisers examined, a figure the court cited as evidence that the rule's antifraud justification was pretextual rather than grounded in demonstrated harm. Because the phased compliance schedule for the preferential treatment disclosures never took effect before the vacatur, per SEC.gov, no adviser ever had to comply with it. The rule existed on paper for roughly a year and produced zero disclosures. The scale of what got rolled back is worth sitting with. Reuters, in its June 5, 2024 coverage, described the private funds industry affected by the rule as managing roughly $27 trillion in assets. That is the size of the market that briefly had a disclosure mandate and now does not. The Managed Funds Association, which represents hedge fund and alternative investment managers, had opposed the rule alongside private equity trade groups, arguing the SEC had exceeded its authority under the Investment Advisers Act. The court agreed with that argument in full.

Why the Vacatur Matters More for Small Checks Than Big Ones

Large LPs did not need the preferential treatment rule as much as smaller investors did. A $50 million anchor already has counsel reviewing every side letter in a fund as a condition of investment, already has a standing MFN clause, and already has the relationship capital to call the GP and ask what other big checks got. The disclosure rule would have been a convenience for that investor, not a lifeline. For the accredited investor writing a $100,000 to $500,000 check, often through a feeder fund, a rolling SPV, or a platform that aggregates smaller commitments into a single line on the cap table, the rule would have been the only mechanism forcing anyone to tell you what you were missing. That mechanism is gone. What replaces it is nothing. There is no successor rule in front of the SEC right now, and per the Paul Weiss memo, the Fifth Circuit's reasoning about the limits of the SEC's rulemaking authority under the Advisers Act makes a substantially similar rule difficult to reissue without new legislation. This is the honest version of the story: the protections that would have applied evenly across an LP base got struck down because the same court found the SEC hadn't shown enough evidence of harm to justify federal rulemaking on this scale. Whether the rule was well-designed policy is a separate question from whether smaller investors are now worse off in practice. They are. Before the rule, they had no disclosure right and no MFN leverage. After the vacatur, they have no disclosure right and no MFN leverage. Nothing changed in their favor, and the one shot at changing it went away.

What You Can Actually Negotiate

If you are investing at the accredited level and the fund's minimum commitment gets you an actual limited partnership interest rather than a feeder position, ask for a side letter even if the number seems too small to warrant one. Many GPs will grant basic protections, such as most-favored information rights or a fee cap tied to your commitment tier, to investors who ask, simply because it costs the GP nothing to say yes and it keeps the relationship warm for a future, larger check. The worst outcome of asking is a no. If you are investing through a feeder fund or SPV, understand that your MFN rights, if the vehicle has any at all, belong to the feeder's sponsor, not to you individually. Read the feeder's own operating agreement, not just the underlying fund's LPA. Ask the sponsor directly whether the feeder negotiated an MFN clause with the underlying GP and, if so, whether that benefit passes through to feeder investors proportionally or gets absorbed by the sponsor. This is a question sponsors do not love answering, which is exactly why you should ask it before wiring money, not after. If you do land a side letter with an MFN provision, calendar the election window the day you sign. A 30-day window that opens at final close and closes silently is the single most common way investors lose an MFN right they actually have. Set a reminder now, because nobody at the fund is going to remind you later. This connects to the same discipline you'd apply to clawback provisions in a fund's carry structure: contractual protections you never invoke are protections you don't have. Finally, ask the GP directly whether other LPs have side letters with terms materially different from yours, and ask what class of investor those terms went to. GPs are not required to volunteer this, and after the vacatur they are even less likely to. But most will answer a direct question honestly rather than lie outright to an investor's face, and a vague or evasive answer tells you something too. If the fund also offers co-investment rights to larger LPs, ask whether any allocation exists for smaller check sizes. Sometimes it does. Sometimes it is simply never mentioned unless you bring it up first. None of this closes the access gap between a $50 million anchor and a $250,000 accredited investor. It cannot. What it does is make sure you are not leaving protections on the table that were available to you the whole time, simply because nobody told you to ask. The broader lesson extends past MFN clauses specifically. Private fund terms are negotiated in tiers everywhere, not just on fees and information rights but on liquidity, transfer restrictions, and default remedies. The SEC's attempt at a uniform disclosure floor failed in court, and there is no indication a replacement is coming soon. Until one does, the only leverage an accredited investor has is asking sharper questions before the wire goes out, not after. Treat every fund subscription document as a starting point for negotiation rather than a form to sign quickly, and treat every "standard terms for your check size" answer from a GP as the opening line of a conversation, not the end of one.

Author Disclosure: Jeff Barnes, MBA has no personal position in any company, fund, or platform named in this article. Angel Investors Network has no current commercial relationship with any party mentioned. AIN provides marketing and education services, not investment advice. Past performance does not guarantee future results. All investments involve risk, including loss of principal.