What is a most-favored-nation clause?
A most-favored-nation clause guarantees that one party will receive terms at least as favorable as those given to any comparable counterparty. If the other side later grants someone a better term, the MFN holder automatically gets the benefit of it. The phrase is borrowed from trade treaties, but in private markets it shows up in fund side letters, financing documents, and commercial contracts.
In fund formation it is the classic protection for a large limited partner: a side letter MFN means that if the manager gives another investor a lower fee, better reporting, or stronger rights, the MFN-protected LP can elect to take those same terms. It prevents the manager from quietly cutting better deals with later or larger investors.
The clause is fundamentally about parity. It does not fix the terms in advance; it ties one party's terms to the best terms anyone else negotiates, so they can never be left worse off than their peers.
How an MFN provision works
The value of an MFN lives in its scope — who it compares against, what terms it covers, and how the holder actually claims the better deal.
- Define the comparison set. The clause specifies whose terms count. In funds, MFNs are usually tiered by commitment size, so a large LP can only match terms given to investors who committed the same or less.
- Scope the covered terms. The parties negotiate what is subject to MFN — economics like fees and carry, governance rights, reporting, or only some subset. Sensitive bespoke terms are often excluded.
- Disclosure and election. The granting party must disclose the other side letters or terms in scope, and the MFN holder elects which favorable terms to adopt. They typically cannot cherry-pick a single term out of a linked package.
- Ongoing or one-time. Some MFNs apply only at closing; stronger ones run for the life of the relationship, capturing terms granted to investors who come in later.
The disclosure step is where MFNs become operationally heavy: someone has to compare every side letter against every MFN holder's entitlements.
Where MFNs appear and what to watch
Beyond fund side letters, MFNs appear in venture financings (an investor wanting terms no worse than a later round's), in supply and licensing contracts (a customer wanting pricing no worse than any other customer's), and in convertible notes and SAFEs (a holder entitled to better terms granted to later note holders).
The practical risk is administrative as much as legal. A manager who has granted MFNs to several investors must, on every new side letter, check whether the new term triggers an entitlement for everyone holding an MFN. Tiering, scope exclusions, and clear records are what keep an MFN from quietly entitling the entire investor base to the most generous term ever granted.