Side letters grant individual investors rights outside the main documents. A most favoured nation clause entitles you to any better terms given to comparable investors in the same round.
10 min read · Level 4
MFN is the most efficient clause available to a small investor, because it replaces a negotiation you would lose with an entitlement you cannot be excluded from. I would ask for it in every convertible instrument, and I would pay particular attention to whether the company is obliged to tell you when it is triggered, since a right you must discover yourself is worth considerably less.
A side letter is a short agreement between the company and one investor, granting rights that are not in the main documents. Common contents:
Right Typical wording effect Information rights quarterly or annual financial statements Pro-rata rights the option to maintain ownership in future rounds MFN clause entitlement to better terms granted to comparable investors Reporting specific figures or a standard update format
Most favoured nation. If the company later grants another investor in the same round better terms - a lower cap, stronger rights, a better preference - an MFN clause entitles you to the same. It protects against being the least favourably treated participant without having to monitor every other investor's agreement.
MFN clauses vary in scope. Points worth checking:
Question Why it matters Which investors are compared all investors, or only those investing similar amounts Which terms are covered economic terms only, or rights as well What period applies only this round, or later rounds too How you learn about better terms whether the company must notify you
A clause that entitles you to better terms but requires you to discover them yourself is much weaker than one requiring notification.
Side letters can also work against you. If other investors hold side letters granting rights you do not have - consent rights, preferential information, early liquidity - your position is weaker than the main documents suggest.
Because the main investment documents are not the whole agreement. Side letters can change who has which rights in ways that are invisible if you only read the shareholders' agreement.
MFN is particularly useful for small investors because it substitutes for negotiating power: rather than arguing for each term, you take whatever the best-treated comparable investor received.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
An MFN clause that paid off. An angel invested 25,000 on a SAFE with a 6,000,000 cap and an MFN clause covering the same round.
Three months later the company, needing more money, issued further SAFEs at a 4,500,000 cap. The MFN clause entitled the angel to the lower cap:
At 6,000,000 cap: 25,000 / 6,000,000 = about 0.42% of the company At 4,500,000 cap: 25,000 / 4,500,000 = about 0.56% of the company
The clause increased their ownership by about a third, with no negotiation at the time. Without it, the later investors would simply have received better terms for the same round.
Assuming the main documents describe everyone's rights. Side letters held by other investors can grant them protections and access you do not have.
Request a short letter covering information, pro-rata and MFN rather than relying on informal promises.
Confirm which investors and which terms it compares, and whether it extends beyond the current round.
Ask that the company tell you when better terms are granted, rather than leaving you to find out.
Find out what rights other investors hold that are not in the main documents.
When joining any round, particularly on convertible instruments where terms may change between closings.
Do not rely on an MFN clause as a substitute for reading the terms you are agreeing to. It protects against worse treatment, not against bad terms everyone received.
Companies raising on convertible instruments over an extended period frequently issue later instruments on better terms as circumstances change, and investors who joined earlier without an MFN clause receive the original, less favourable terms.
On any instrument that may have multiple closings, an MFN clause is the simplest protection against being early and worse off.
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