Deciphering MFN: Key Considerations Every Investor Should Know
Professionals navigating the complex landscape of investments encounter the term “Most Favored Nation” (MFN). Understanding the implications of Most Favored Nation status in global investments is crucial for making informed decisions.
Elena Simon, Head of Legal at Yellow Rocks, highlights what investors need to know about Most Favored Nation status.
What is the Most Favored Nation (MFN) Status?
Most Favored Nation (MFN) is a provision safeguarding early-stage investors. Suppose a late-stage investor in the round secures more favorable terms in their Simple Agreement for Future Equity (SAFE) than you. In that case, MFN enables you to demand similar conditions for yourself.
Key Points for Investors
- MFN and Investment Conditions:
Investors often wonder about the implications of MFN status in the context of their investment agreements. If subsequent investments are not secured, the conditions under which conversion occurs with MFN come into play. For instance, opting for a standard SAFE with MFN means preceding a Post-Money Valuation Cap or Discount Rate. Without additional investments, the startup would convert based on the terms of an Equity round.
- Multiple Uses of MFN:
The MFN provision is generally a one-time opportunity. Once exercised and the terms of an agreement are modified, subsequent use of MFN for issuing new SAFEs with more favorable terms may not be possible.
- Application of MFN to Additional Agreements:
The provisions of MFN shall not apply to supplemental letters or agreements that do not modify the terms of subsequently issued SAFEs, including pro rata and observer rights.
- Incorporating MFN into Side Letters:
Investors contemplating more favorable terms in side letters can trigger the MFN provision if these additional agreements modify the economic conditions of the SAFE.
- MFN in Down Rounds:
MFN remains applicable even in down rounds, ensuring the previously agreed-upon terms are adjusted to reflect the changed valuation.
- MFN alongside Post-Money Valuation Cap or Discount Rate:
Investors can combine MFN with a Post-Money Valuation Cap or Discount Rate. These conditions are not mutually exclusive but complementary, providing a nuanced approach to investment terms.
- Customizing MFN Provisions:
While the standard formulations of MFN exist, investors can tailor the application of MFN to their specific needs. This includes specifying the conditions triggering MFN, the process of notifying parties about new SAFEs, and the duration of the right.
Understanding Most Favored Nation status goes beyond its traditional interpretation, delving into its impact on investment terms. Investors need to navigate the intricacies of MFN to leverage its benefits in securing equitable and favorable conditions in a dynamic global investment landscape.
About Elena Simon:
→ Investment and Corporate Lawyer.
→ CEO of YR Legal.
→ Five years in VC.
→ 35+ closed deals.
