SAFEs: What is a Most Favored Nation (MFN) clause?
This week’s question: What is a Most Favored Nation (MFN) clause in a SAFE?
Our answer: An MFN clause in a SAFE gives a SAFE investor the right to amend its SAFE to match the most favorable economic terms granted to any later SAFE investor. This sequence effectively ties future SAFE issuances back to earlier investors’s SAFEs. In practice, an MFN often arises in a couple of scenarios: (i) a founder issues a very early SAFE with an MFN but no valuation cap or discount rate so that these terms are to be determined (if ever) by future SAFE issuances or (ii) a SAFE investor gets an MFN clause for added protection against future issuances with more favorable terms. While MFNs are often pitched as investor-friendly but founder-neutral, in reality they can materially constrain fundraising strategy if not carefully limited, timed and planned.
Key Considerations:
MFNs Flatten Risk. Without an MFN, founders typically raise SAFEs at progressively higher valuation caps and more company favorable terms as traction improves to reflect reduced risk over time. However, an MFN disrupts this sequencing. When better terms are offered to any later SAFE, MFN holders can opt into those same terms, causing multiple SAFEs to converge economically. This flattening can result in early investors receiving the benefit of later stage SAFE terms without bearing the same later stage risk or reflecting the company’s maturation. This undermines the startup’s ability to be rewarded for incremental progress.
MFNs Quietly Compound Dilution in Conversion. The effects of MFN dilution aren’t often evident until a financing model is run in detail. When SAFEs convert in a priced round, each SAFE converts based on its final economic terms. That means MFNs can upgrade early SAFEs into lower conversion prices than founders originally modeled, increasing their ownership percentage at conversion. And because SAFEs convert before new money investors purchase shares and new money investors will protect their target ownership, the additional dilution caused by MFN upgraded SAFEs is absorbed primarily by founders.
MFNs Reduce Flexibility. Founders often don’t realize how much MFNs can hamper future fundraising efforts. Because any future improved term offered later will retroactively apply to earlier MFN SAFEs, founders may feel pressured to keep later SAFE terms artificially conservative or in line with the MFN SAFE. This can make it harder to close new investors who expect improved economics and effectively shifts negotiating leverage away from founders.
Why It Matters.
An MFN seems simple and even innocuous, but it can directly affect how much control startups retain over the terms, sequencing and dilution across multiple SAFE rounds. In many cases, an MFN can quietly erase the benefits of raising later SAFEs at higher valuations, affect negotiating leverage with new investors and increase founder dilution at conversion without any additional capital being raised. Founders who understand MFNs early can structure them and their SAFE raises thoughtfully, or even avoid them entirely, to preserve flexibility and leverage.
