What is a most favored nation clause for investors?
Short answer
A most favored nation clause, or MFN, says that if the sponsor gives another investor better terms, you can ask for those terms too. It often appears in side letters. The details change from one document to the next, so many investors read the exact wording closely and talk to a securities attorney about it.
If a sponsor gives another investor a better deal, an MFN clause lets you ask for it too. I see it most often in side letters, where one investor negotiates a lower fee or a special reporting right and others want the same.
How the clause usually works
In general terms, the sponsor agrees to tell you about better terms given to other investors in the same fund or deal. You then choose whether to take them. Many clauses make you accept the whole package, not just the pieces you like.
The clause rarely covers everything. These are carve-outs I often see described:
- Terms given to investors who commit more capital
- Terms tied to being an early or first closing investor
- Terms tied to one investor's special circumstances
- Rights tied to a seat on an advisory committee or board
Each carve-out narrows the protection. A clause that excludes anything tied to size may give a smaller investor very little in practice.
Why the wording matters more than the label
Two documents can both say MFN and protect you very differently. The carve-outs, the notice process and the time you get to respond decide what you actually receive. That is why I keep telling investors to read the agreement itself.
This interview with a deal structuring attorney makes the case for reading every word of an agreement before you put money in.
Summary and key takeaways from this video
"Really, there's language in there sometimes where people call me up and they're shaking their heads, going, "I just didn't know it was in there."."
The guest, a lawyer who structures deals, gave one example. A company was doing well, and the investor had missed a repurchase clause that let the company buy back all the stock. He says he goes through every word with his clients. An MFN clause is the same kind of language. It is easy to skip and costly to misread.
Questions I would ask before signing
- Does the clause cover all investors or only my class?
- What are the carve-outs?
- Must I take the full package of better terms or can I pick?
- How will I be told, and how long do I have to elect?
- Does it reach investors who come in after me?
I am not a lawyer and this is general information only. Many investors talk to a securities attorney about points like these.
If you are the one raising capital
Many sponsors treat every special term as something that may pass to other investors. Keep a running list of each side letter and what it grants. Many sponsors talk to their own attorney about how an existing MFN clause may affect new promises to one investor.
Handing out quiet favors early can create obligations you did not plan for. We at Family Office Club see due diligence as the place where people lose the most, and that applies to the sponsor's own paperwork as much as the investor's.
What I have said on this at our events
Many investors never get to the MFN clause because they do not read the whole document. The guest said that in his experience about 90% of typical investors will put money into a deal without reading the PPM word for word. It can run 130 pages, and most of these investors are founders or entrepreneurs who already spent their time meeting the CEO and going through the pitch deck. An MFN clause is buried in exactly that kind of material. If you cannot read every page, at least find the side letter and MFN sections and consider talking with your attorney about them.
"In my experience, 90% of typical investors will invest in something and not even read the PPM word for word. It's 130 pages long. Most investors are founders or entrepreneurs. Just the work to meet with the CEO in person, to review the pitch deck and read every word of that is enough of a time constraint for a lot of private investors."
From the source
- The guest said people call him after signing because they did not know a clause was in their agreement.
- His example was a repurchase clause that let a successful company buy back all of an investor's stock.
- He says due diligence is where people lose more money than anywhere else, and he goes over every word of an agreement with clients.
Sources
From Richard C. Wilson's Centimillionaire Strategies YouTube channel: Private Investor Mandate Interview Focused on Consumer Products & Amazon Companies, FinTech and B.... Quotes come from the video captions, lightly edited for readability. Figures are the speakers' own estimates and experience.
General education only. Not legal, tax or investment advice.
Talk to a securities attorney to explore options around MFN clause wording, side letter terms and offering documents. Do not use AI to write your own legal agreements.
What to do next
- 1Find every side letter and MFN clause in the documents you are reviewing.
- 2List the carve-outs and mark which ones could apply to you.
- 3Check how notice and the election window work.
- 4Consider talking to a securities attorney about the exact wording.
- 5If you raise capital, keep a log of every special term you grant.
People also ask
Is an MFN clause the same as a side letter?
No. A side letter gives one investor special terms. An MFN clause is a promise that other investors can ask for those terms. The two often show up together.
Can a sponsor refuse to include an MFN clause?
It is often a negotiated term, and many investors do not get one. Larger investors usually have more room to ask for it.
Do I need a lawyer to review an MFN clause?
Many investors choose to talk to a securities attorney about it. The carve-outs and election process are in the fine print.
Related questions
- What is a promote and how is it calculated?A promote is the back end profit that goes to the sponsor or operating partner after the investors who put in the money have received their preferred return.
- How does a distribution waterfall work?A distribution waterfall is the order in which a deal pays out cash.
- How does revenue-based financing work for growing companies?Revenue-based financing gives a company capital in exchange for a share of its sales until the investor is repaid.
- How do I structure an earnout in an acquisition?Tie part of the purchase price to how the business performs after closing.
Work through it with the dilution calculator. See all deal structuring resources.