The MFN Clause Trap: When "Most Favored Nation" Backfires

A Most Favored Nation (MFN) clause sounds fair: if you offer better terms to later investors, earlier investors automatically get those terms too. What could go wrong?

A lot, actually.

How MFN Clauses Work

A typical MFN clause says: "If the Company issues any SAFE with terms more favorable to the investor, this SAFE will automatically be amended to reflect those terms."

The intent is to protect early investors from being disadvantaged by later deals. Seems reasonable—but the devil is in the details.

When MFN Clauses Cause Problems

Scenario 1: The Accidental Repricing

You raise $500K at a $10M cap with an MFN. Six months later, the market has softened, and a strategic investor will only come in at an $8M cap. That's fine—it's only one investor.

Except it's not. Your MFN clause reprices all previous SAFEs to $8M. Your early investors just got 25% more equity, and you just took 25% more dilution across the board.

Scenario 2: The Clause That Covered Too Much

Some MFN clauses are written broadly enough to include priced rounds. If your Series A valuation is lower than your SAFE cap, do all your SAFE investors get the Series A price? With a poorly drafted MFN, maybe.

Scenario 3: The Side Letter Cascade

You give one investor a side letter with additional rights—say, information rights or a board observer seat. An aggressive reading of an MFN clause could give those rights to everyone.

How to Protect Yourself

1. Limit scope to the same round. MFN should only apply to SAFEs issued in the same financing, not future rounds.

2. Exclude certain terms. Specifically carve out things like: different check sizes (a $1M investor might reasonably get a lower cap), strategic investors, side letter provisions, and priced rounds.

3. Consider avoiding MFN entirely. If you're confident in your terms and won't be offering lower caps later, MFN adds complexity without benefit.

4. Get legal review. MFN clauses have real teeth. Make sure you understand what you're agreeing to.

The Bottom Line

MFN clauses are not inherently bad, but they need to be narrowly scoped. A well-drafted MFN protects early investors without creating cap table chaos. A poorly drafted one can cost you significant equity in unexpected ways.

When in doubt, limit MFN to SAFEs issued in the same round with the same investor class. Anything broader is asking for trouble.