Should founders accept a Material Adverse Change (MAC) clause, commonly referred to as an MFN (Most Favored Nation) clause, in their investment agreements? This question is often a topic of debate among entrepreneurs and investors alike. The answer, however, depends on several factors, including the stage of the company, the terms of the investment, and the founder’s long-term vision for the business.
In the initial stages of a startup, securing funding is crucial for growth and survival. Investors often include MFN clauses in their term sheets to ensure that they receive the same, or better, terms than any other investor who comes in later. While this may seem beneficial for the investor, founders must carefully consider the implications of accepting such a clause.
One of the primary concerns with MFN clauses is that they can create a sense of uncertainty and potential legal disputes. Founders may find themselves in a situation where they have to renegotiate their investment terms every time a new investor joins the round, which can be time-consuming and costly. Moreover, if a new investor demands more favorable terms, it could lead to a power imbalance between the founders and the investors, potentially compromising the founder’s control over the company.
However, there are scenarios where accepting an MFN clause might be in the best interest of the founder. For instance, if the company is in a highly competitive market and attracting investors is a challenge, an MFN clause can provide a level of comfort to potential investors, making it easier to secure funding. Additionally, if the founder is confident that the company’s value will significantly increase over time, they may be willing to accept an MFN clause to ensure that they receive fair compensation if a new investor joins the round with better terms.
To mitigate the risks associated with MFN clauses, founders can negotiate certain protections. One approach is to limit the scope of the clause to specific terms, such as valuation, anti-dilution provisions, or board representation. By narrowing the scope, founders can reduce the likelihood of disputes and retain more control over the company’s future.
Another strategy is to include a “no-shop” clause in the investment agreement, which prevents the company from actively seeking alternative investors. This can provide the founders with more time to evaluate the potential impact of an MFN clause on their business and negotiate the best possible terms.
Ultimately, whether founders should accept an MFN clause depends on their individual circumstances and risk tolerance. It is essential for founders to seek legal advice and thoroughly understand the implications of such a clause before making a decision. By doing so, they can ensure that their company’s interests are protected and that they maintain a strong position as the company grows and evolves.
