I’ve (unfortunately :P) spent a lot of time thinking about MFNs - I find them fascinating since they force you to think hard about “fairness”. This blog post is my attempt to articulate some of this thinking, and about MFNs in pre-seed/seed crypto deals. This blog post assumes some familiarity with SAFEs and token launches.

An investor using an MFN simply says:

“If you give a future investor a sweeter deal than the deal you gave me, then you have to let me upgrade my deal to the sweeter deal”.

Example 1

2023: Investor A invests in Company X through a SAFE at $50M valuation cap with an MFN.  

2024: Investor B invests in Company X through a SAFE at $25M valuation cap. 


The result? Investor A’s valuation cap is reduced to $25M due to the MFN.
 


Example 2  

2023: Investor A invests in Company X through a SAFE at $25M valuation cap with an MFN.  

2024: Investor B invests in Company X through a SAFE at $25M valuation cap but with Investor B’s shares converting at a 20% discount to the series A round price if the series A round size is larger than USD $25M. 


The result? Investor A can get the same 20% discount that Investor B gets.  

Note that Investor A is getting an economic upgrade here. It could also be a rights/governance upgrade.

For example, if Investor B had information rights but Investor A did not, Investor A would get information rights too, because of the MFN. So there are two kinds of MFNs - MFNs on economic terms and MFNs on governance terms.  

When an MFN applies to economic terms, it is a zero-sum game between the investor and the founder - in the above example, the founder gets more diluted because of the MFN. An MFN on governance terms is similarly zero-sum for the founder, but the damage is less “obvious”.  

There can be a few impulses behind an investor’s ask for an MFN. I have broken them down into two broad “themes”.  

The “Uncertain Terms” Theme  


#1 “I am investing very early & I am founder-friendly so I recognize that we don’t have the time to negotiate terms. I’m going to live with no/minimal/founder-friendly terms now, but when you raise more capital later on and negotiate terms with your next investors, make sure I am treated as well as they are”.



#2 “It’s super-early and hard to price this deal now…how about we price it now at the SAFE cap you want, but give me an MFN? That way, if another VC sets a price that is lower than my SAFE cap when you go to the market again, I should get the same price as that VC gets”.  

Note: The “classic” example of MFN in #1 is YC’s standard deal - $125,000 for 7% of the project’s stock and a further $375,000 on an uncapped SAFE (but with an MFN, meaning this SAFE could convert at the lowest pricing the project gets after entering YC). The MFN in #2 is a strong downside protection and it has become a standard feature of pre-seed SAFE financings because they are highly risky and hard to price - more on this below.  

The “Fairness” Theme 




#3 “We have spent the last 3 weeks fighting tooth & nail over every single investor right in this side letter. I don’t agree with your position, but I can give up all these points in order to close. You better give me an MFN though, so that if you give these rights to other investors in this round, I get equal treatment!”.  

#4 “We’ve had a long negotiation and there is still a big bid-ask spread. I really want to get into this round so let’s close at your suggested price. But if you give another investor a better price next month, I will look like a schmuck. So give me an MFN as schmuck insurance”.  

#5 “I am going to commit early for a significant portion of your pre-seed round. But I don’t want to a situation where you are looking for a lead, say 2 or 3 months later, and then a tier 1 VC wants to lead at a lower valuation than the one you gave me, and you end up saying yes. If that happens, I should get the same pricing that the lead does, since I took the most risk by committing early on”.
 


#6 “We’re significant investors in this round/project/fund and we believe all investors should be treated the same (or at least, all investors with the same cheque size). As a matter of fairness, if you treat any other investors more favorably, we should receive the same treatment. So give me an MFN”.  

Note: The MFN in #5 is squarely applicable to the most common round structure for crypto pre-seed deals - a “rolling close” over months with a big group of investors, featuring more than one lead and some “almost” leads. The MFN from #6 is most commonly seen between investment funds and their LPs - this subset of MFNs deserves its own post and in fact, most of the literature on MFNs is actually about MFNs in investment fund side letters.  

Zooming out - MFNs try to bridge the gap between two investors who are being treated differently at different points in time (which differential treatment may seem subjectively “unfair” to the investor receiving less favourable treatment).  

But this begs the question - should investors be treated equally or fairly?

Since investor rights and the founder’s interests exist in a zero-sum game, the founder’s incentive is (rationally speaking) not to treat investors fairly, but to be able to offer different deals to different investors. This means founders (and investors!) will seek differential treatment depending on the commercial scenario.

Let’s map some of these scenarios.  

Scenario #1: The investor who brings the most benefit to the founder/project gets the best deal, and the investor who brings the least benefit gets the least favourable deal (for example, if Coinbase Ventures is investing into a wallet/on-ramp project, they can ask for better terms due to the semi-strategic nature of their deal by dangling the carrot of integrations). In other words, strategic investors can (and very often do) cut better deals for themselves.  

Scenario #2: The investors who invest the highest amount/have the largest stake are able to get a better deal than the investors who invest less/have a smaller stake - this is self-explanatory.  

Scenario #3: An investor who takes more risk will want to be treated better than (or at least the same as) an investor who invests at a more de-risked point (see: Paul Graham’s seminal “High Resolution Fundraising” blog post).  

Note: Assuming growth is up and to the right, as a general principle the earliest investors who take the most risk get the best terms (i.e., lowest entry valuation) and later investors who invest at progressively less risk levels get worse terms (i.e., more expensive valuation). Viewed from this lens, an MFN on economics for early investors is simply a tool to ensure that this general principle is respected across a certain time frame - more on that below.  

Scenario #4 When a founder has a lot of negotiating leverage, he/she is able to command terms and offer differential deals to investors; when the founder has less negotiating leverage, the tables are turned and an investor with strong negotiating leverage can command differentiated terms (for example, an investor providing bridge financing when runway is low, or a marquee VC leading a big round when competitors have recently also raised big rounds in a “winner takes all” market).  

Note: This scenario has a time aspect - as a project matures, the founder’s negotiating leverage increases (especially against smaller investors, who are basically just happy to receive valuation mark-ups). You can see this playing out in investment docs for series A deals - investors are divided into two classes, the “Major Investors” and the others, each having different rights. It gets more pronounced in growth stage investment docs, where you see fine-grained distinctions between various classes of investors based on their stake/capital invested, and the rights available to these classes. Series A & later investment documents almost never have MFNs, because by this point, unequal treatment of investors (in the context of governance rights) becomes an immutable law of physics.  

This brings us to an interesting point: MFNs on economics function as downside protection and they seem standard in seed/pre-seed SAFE deals, yet you rarely see an MFN on economics in any series A or later deal.

Why? I think the answer is two-fold.  

Firstly, in priced/preferred stock funding rounds, the “market” & customary investor protection when a down round happens is a broad-based anti-dilution right.
MFNs on economics are deviations from this “market” standard and are hence unacceptable.

Note: From a founder perspective, a SAFE with an MFN on its valuation cap is almost identical to the most aggressive form of anti-dilution protection - the much-loathed “full ratchet”. See Example 1 in Part I above.  

Secondly, in the context of pre-seed & seed, the market sees a series A deal as a de-risking event. Before series A, there is a lot more risk, so stiffer downside protections are accepted, and post series A, downside protections revert to the customary broad-based anti-dilution right.  

An interesting point is that the anti-dilution right is intended to do exactly that - protect an investor from excessive dilution caused in a down round by giving the investor a small top-up.

But it is well-known that when successive rounds of SAFE financing happen, even if some are down rounds, early investors do not get diluted by the new SAFEs - only the founding team and stock option pool get diluted. So an MFN tied to a SAFE’s valuation cap does not function as a downside protection for investors. It is more like a safety net for the investor’s pricing judgment when more data (i.e., an externally set benchmark) becomes available  

That said, if an MFN is triggered when a project does a down round with successive SAFEs, the dilutive impact on the founder’s stake is quite heavy. See illustration below.  

Early Investors: Investor A invests $800,000 & Investor B invests $1M at $22.5M cap SAFE, each with MFN.
Initial Cap Table: Investor A holds 3.55%, Investor B holds 4.44%, and Founder holds 92.01%
Later Investors: Investor C invests $700,000 and Investor D invests $500,000 at $14M cap SAFE
New Cap Table: Investor A holds 5.7%, Investor B holds 7.14%, Investor C holds 5%, Investor D holds 3.57% and Founder holds 78.59%

What are the implications of this?  

Implication #1 Founders should very carefully think about the risk of raising through successive SAFEs with MFNs at excessive valuations that the project cannot grow into or maintain – it’s possible they may get significantly diluted if there is a correction/down round. This is a risk call, ofc (you might be leaving significant value on the table if you let downside risks like future MFNs issues dictate your pricing).

Implication #2 Early investors, on their part, should consider waiving MFNs when triggered in such down rounds – early investors don’t get diluted anyway, and it is not in the investors’ interests to have founders heavily diluted and poorly incentivized. For example, if there have been significant & unforeseen regulatory headwinds + the project has pivoted and is now raising a new round for a new business model more than 2 years after the initial raise, founders might be justified in asking early investors to waive their MFNs.  

A quick drafting tip here to ensure an MFN is founder-friendly – if a group of investors is given an MFN, the founder should be allowed to waive the MFN for an entire group as long as the majority of the investors (by $ value invested or implied stake) consent to it, and as long as the waiver is equally applied to that entire investor group. MFN waivers usually occur in the course of a crucial funding round in a project’s lifecycle - this waiver mechanism ensures that a minority of investors in group do not hold-out, re-trade, or derail the funding round.  

There are two important differences between crypto pre-seed/seed & similar web2 deals:
 


#1 Investors use SAFEs for successive rounds of funding, and

#2 Investors get tokens rights, with the investor’s token allocation typically calculated as a fraction of the investor’s equity stake (this called a token conversion ratio – for e.g., 1% of the token supply for each 3% block of an investor’s equity stake is a 3:1 token conversion ratio).  

Investors often view the token as the primary exit mechanism. Accordingly, token rights are subject to a push and pull of two competing incentives - investors want the largest possible token holding, yet at the same time,  tokenomics cannot be “insider heavy”, they have to be sustainable i.e., the founding team should be well-incentivized, the airdrop should create a broad-based liquid market, and the project should have a healthy token treasury for its business needs.  

Given the tokenomics concerns and the correlation between an investor’s equity stake and an investors’ token rights, founders need to be sensitive to the MFN’s potential impact on tokenomics (i.e., if an investor’s MFN on SAFE economics is triggered, that investor will also get more tokens).

This is not only a founder concern, but sophisticated investors also focus on this – balanced tokenomics is important for the project as a whole, especially at a time when the market hates “low float, high FDV” TGEs.  

Investors also ask for MFNs on the token rights themselves (as opposed to SAFE economics or governance rights).  

Here’s an example of an MFN on token rights at work: if Investor A has a 3:1 token right and an MFN, and Investor B gets 2:1 token rights in the next funding round, Investor A can now claim 2:1 token rights too. Similarly, if Investor B has a more favorable unlock schedule (or an ability to stake unlocked tokens), Investor A gets these benefits too.  

MFNs on token rights are sometimes hotly contested in negotiations!

Founders push back because they want the flexibility to entice Investor B with a sweeter deal on the token side (for e.g., what if Investor B is extremely deep-pocketed, bullish on the space, and is willing to invest a huge slug of capital at a very friendly valuation?). This will not be possible if they need to extend the same terms to their earlier investors too, resulting in dilution across the board.

Founders also push back because they need to give differentiated token rights to market makers, KOLs, CEX venture arms, integration partners who might bring in TVL etc. while building out the project and preparing for a successful TGE. They don’t want to give the same token rights to multiple early investors too!

Founders push back because they do not want to keep going back to a large set of early investors to waive their MFN for each such deal (reminder: every instance where the founder needs to request a waiver exposes the founder to hold-outs, re-trading, delayed responses, and similar hurdles to deal-making). They ask investors to trust their judgement and let them act in the project’s best interests.

Founders also fear that this kind of MFN can have a cascading effect in a down round - multiple early investors suddenly get more tokens and this may result in unbalanced tokenomics. 


On the other hand, early investors might be willing to live with some carve-outs to their MFN on token rights but generally insist that (as a matter of fairness) later-stage investors who take lesser risk should not get more favorable token rights.  

How should this negotiation resolve?  

In my view, early investors should be willing to live without an MFN on the token conversion ratio because their economics are protected through their own token conversion ratio (3:1 or 2:1 or whatever it may be). In other words, the absolute number of tokens they receive will not change simply because someone else is given a better deal. The absolute number of tokens an early investor receives is a function of how much dilution their equity stake suffers as the project raises funds. This means that equity valuations are the relevant metric, not token conversion ratios.  

As a result, early investors should give founders the flexibility to strike deals with more favorable token conversion ratios with other stakeholders because these “more favorable” deals usually come at the expense of the founder (thereby incentivizing the founder to be tightfisted, not generous).  

That said, early investors should not give founders the flexibility to give later investors shorter unlock periods or the ability to stake locked tokens – while it’s a subjective take, in my book this is patently unfair to early investors.  

The private funding market in crypto is volatile. The early years of a project’s life could see a bull market and a bear market in quick succession, with the founder’s negotiating leverage oscillating wildly – meaning that MFNs are often “in play”. Equity dilution, MFNs, and tokenomics are tightly correlated, so it is important for a founder to navigate this thoughtfully.

PS: Apologies for the length! Needless to add, the views I have expressed here do not reflect the views of my employer.

I’ve (unfortunately :P) spent a lot of time thinking about MFNs - I find them fascinating since they force you to think hard about “fairness”. This blog post is my attempt to articulate some of this thinking, and about MFNs in pre-seed/seed crypto deals. This blog post assumes some familiarity with SAFEs and token launches.

An investor using an MFN simply says:

“If you give a future investor a sweeter deal than the deal you gave me, then you have to let me upgrade my deal to the sweeter deal”.

Example 1

2023: Investor A invests in Company X through a SAFE at $50M valuation cap with an MFN.  

2024: Investor B invests in Company X through a SAFE at $25M valuation cap. 


The result? Investor A’s valuation cap is reduced to $25M due to the MFN.
 


Example 2  

2023: Investor A invests in Company X through a SAFE at $25M valuation cap with an MFN.  

2024: Investor B invests in Company X through a SAFE at $25M valuation cap but with Investor B’s shares converting at a 20% discount to the series A round price if the series A round size is larger than USD $25M. 


The result? Investor A can get the same 20% discount that Investor B gets.  

Note that Investor A is getting an economic upgrade here. It could also be a rights/governance upgrade.

For example, if Investor B had information rights but Investor A did not, Investor A would get information rights too, because of the MFN. So there are two kinds of MFNs - MFNs on economic terms and MFNs on governance terms.  

When an MFN applies to economic terms, it is a zero-sum game between the investor and the founder - in the above example, the founder gets more diluted because of the MFN. An MFN on governance terms is similarly zero-sum for the founder, but the damage is less “obvious”.  

There can be a few impulses behind an investor’s ask for an MFN. I have broken them down into two broad “themes”.  

The “Uncertain Terms” Theme  


#1 “I am investing very early & I am founder-friendly so I recognize that we don’t have the time to negotiate terms. I’m going to live with no/minimal/founder-friendly terms now, but when you raise more capital later on and negotiate terms with your next investors, make sure I am treated as well as they are”.



#2 “It’s super-early and hard to price this deal now…how about we price it now at the SAFE cap you want, but give me an MFN? That way, if another VC sets a price that is lower than my SAFE cap when you go to the market again, I should get the same price as that VC gets”.  

Note: The “classic” example of MFN in #1 is YC’s standard deal - $125,000 for 7% of the project’s stock and a further $375,000 on an uncapped SAFE (but with an MFN, meaning this SAFE could convert at the lowest pricing the project gets after entering YC). The MFN in #2 is a strong downside protection and it has become a standard feature of pre-seed SAFE financings because they are highly risky and hard to price - more on this below.  

The “Fairness” Theme 




#3 “We have spent the last 3 weeks fighting tooth & nail over every single investor right in this side letter. I don’t agree with your position, but I can give up all these points in order to close. You better give me an MFN though, so that if you give these rights to other investors in this round, I get equal treatment!”.  

#4 “We’ve had a long negotiation and there is still a big bid-ask spread. I really want to get into this round so let’s close at your suggested price. But if you give another investor a better price next month, I will look like a schmuck. So give me an MFN as schmuck insurance”.  

#5 “I am going to commit early for a significant portion of your pre-seed round. But I don’t want to a situation where you are looking for a lead, say 2 or 3 months later, and then a tier 1 VC wants to lead at a lower valuation than the one you gave me, and you end up saying yes. If that happens, I should get the same pricing that the lead does, since I took the most risk by committing early on”.
 


#6 “We’re significant investors in this round/project/fund and we believe all investors should be treated the same (or at least, all investors with the same cheque size). As a matter of fairness, if you treat any other investors more favorably, we should receive the same treatment. So give me an MFN”.  

Note: The MFN in #5 is squarely applicable to the most common round structure for crypto pre-seed deals - a “rolling close” over months with a big group of investors, featuring more than one lead and some “almost” leads. The MFN from #6 is most commonly seen between investment funds and their LPs - this subset of MFNs deserves its own post and in fact, most of the literature on MFNs is actually about MFNs in investment fund side letters.  

Zooming out - MFNs try to bridge the gap between two investors who are being treated differently at different points in time (which differential treatment may seem subjectively “unfair” to the investor receiving less favourable treatment).  

But this begs the question - should investors be treated equally or fairly?

Since investor rights and the founder’s interests exist in a zero-sum game, the founder’s incentive is (rationally speaking) not to treat investors fairly, but to be able to offer different deals to different investors. This means founders (and investors!) will seek differential treatment depending on the commercial scenario.

Let’s map some of these scenarios.  

Scenario #1: The investor who brings the most benefit to the founder/project gets the best deal, and the investor who brings the least benefit gets the least favourable deal (for example, if Coinbase Ventures is investing into a wallet/on-ramp project, they can ask for better terms due to the semi-strategic nature of their deal by dangling the carrot of integrations). In other words, strategic investors can (and very often do) cut better deals for themselves.  

Scenario #2: The investors who invest the highest amount/have the largest stake are able to get a better deal than the investors who invest less/have a smaller stake - this is self-explanatory.  

Scenario #3: An investor who takes more risk will want to be treated better than (or at least the same as) an investor who invests at a more de-risked point (see: Paul Graham’s seminal “High Resolution Fundraising” blog post).  

Note: Assuming growth is up and to the right, as a general principle the earliest investors who take the most risk get the best terms (i.e., lowest entry valuation) and later investors who invest at progressively less risk levels get worse terms (i.e., more expensive valuation). Viewed from this lens, an MFN on economics for early investors is simply a tool to ensure that this general principle is respected across a certain time frame - more on that below.  

Scenario #4 When a founder has a lot of negotiating leverage, he/she is able to command terms and offer differential deals to investors; when the founder has less negotiating leverage, the tables are turned and an investor with strong negotiating leverage can command differentiated terms (for example, an investor providing bridge financing when runway is low, or a marquee VC leading a big round when competitors have recently also raised big rounds in a “winner takes all” market).  

Note: This scenario has a time aspect - as a project matures, the founder’s negotiating leverage increases (especially against smaller investors, who are basically just happy to receive valuation mark-ups). You can see this playing out in investment docs for series A deals - investors are divided into two classes, the “Major Investors” and the others, each having different rights. It gets more pronounced in growth stage investment docs, where you see fine-grained distinctions between various classes of investors based on their stake/capital invested, and the rights available to these classes. Series A & later investment documents almost never have MFNs, because by this point, unequal treatment of investors (in the context of governance rights) becomes an immutable law of physics.  

This brings us to an interesting point: MFNs on economics function as downside protection and they seem standard in seed/pre-seed SAFE deals, yet you rarely see an MFN on economics in any series A or later deal.

Why? I think the answer is two-fold.  

Firstly, in priced/preferred stock funding rounds, the “market” & customary investor protection when a down round happens is a broad-based anti-dilution right.
MFNs on economics are deviations from this “market” standard and are hence unacceptable.

Note: From a founder perspective, a SAFE with an MFN on its valuation cap is almost identical to the most aggressive form of anti-dilution protection - the much-loathed “full ratchet”. See Example 1 in Part I above.  

Secondly, in the context of pre-seed & seed, the market sees a series A deal as a de-risking event. Before series A, there is a lot more risk, so stiffer downside protections are accepted, and post series A, downside protections revert to the customary broad-based anti-dilution right.  

An interesting point is that the anti-dilution right is intended to do exactly that - protect an investor from excessive dilution caused in a down round by giving the investor a small top-up.

But it is well-known that when successive rounds of SAFE financing happen, even if some are down rounds, early investors do not get diluted by the new SAFEs - only the founding team and stock option pool get diluted. So an MFN tied to a SAFE’s valuation cap does not function as a downside protection for investors. It is more like a safety net for the investor’s pricing judgment when more data (i.e., an externally set benchmark) becomes available  

That said, if an MFN is triggered when a project does a down round with successive SAFEs, the dilutive impact on the founder’s stake is quite heavy. See illustration below.  

Early Investors: Investor A invests $800,000 & Investor B invests $1M at $22.5M cap SAFE, each with MFN.
Initial Cap Table: Investor A holds 3.55%, Investor B holds 4.44%, and Founder holds 92.01%
Later Investors: Investor C invests $700,000 and Investor D invests $500,000 at $14M cap SAFE
New Cap Table: Investor A holds 5.7%, Investor B holds 7.14%, Investor C holds 5%, Investor D holds 3.57% and Founder holds 78.59%

What are the implications of this?  

Implication #1 Founders should very carefully think about the risk of raising through successive SAFEs with MFNs at excessive valuations that the project cannot grow into or maintain – it’s possible they may get significantly diluted if there is a correction/down round. This is a risk call, ofc (you might be leaving significant value on the table if you let downside risks like future MFNs issues dictate your pricing).

Implication #2 Early investors, on their part, should consider waiving MFNs when triggered in such down rounds – early investors don’t get diluted anyway, and it is not in the investors’ interests to have founders heavily diluted and poorly incentivized. For example, if there have been significant & unforeseen regulatory headwinds + the project has pivoted and is now raising a new round for a new business model more than 2 years after the initial raise, founders might be justified in asking early investors to waive their MFNs.  

A quick drafting tip here to ensure an MFN is founder-friendly – if a group of investors is given an MFN, the founder should be allowed to waive the MFN for an entire group as long as the majority of the investors (by $ value invested or implied stake) consent to it, and as long as the waiver is equally applied to that entire investor group. MFN waivers usually occur in the course of a crucial funding round in a project’s lifecycle - this waiver mechanism ensures that a minority of investors in group do not hold-out, re-trade, or derail the funding round.  

There are two important differences between crypto pre-seed/seed & similar web2 deals:
 


#1 Investors use SAFEs for successive rounds of funding, and

#2 Investors get tokens rights, with the investor’s token allocation typically calculated as a fraction of the investor’s equity stake (this called a token conversion ratio – for e.g., 1% of the token supply for each 3% block of an investor’s equity stake is a 3:1 token conversion ratio).  

Investors often view the token as the primary exit mechanism. Accordingly, token rights are subject to a push and pull of two competing incentives - investors want the largest possible token holding, yet at the same time,  tokenomics cannot be “insider heavy”, they have to be sustainable i.e., the founding team should be well-incentivized, the airdrop should create a broad-based liquid market, and the project should have a healthy token treasury for its business needs.  

Given the tokenomics concerns and the correlation between an investor’s equity stake and an investors’ token rights, founders need to be sensitive to the MFN’s potential impact on tokenomics (i.e., if an investor’s MFN on SAFE economics is triggered, that investor will also get more tokens).

This is not only a founder concern, but sophisticated investors also focus on this – balanced tokenomics is important for the project as a whole, especially at a time when the market hates “low float, high FDV” TGEs.  

Investors also ask for MFNs on the token rights themselves (as opposed to SAFE economics or governance rights).  

Here’s an example of an MFN on token rights at work: if Investor A has a 3:1 token right and an MFN, and Investor B gets 2:1 token rights in the next funding round, Investor A can now claim 2:1 token rights too. Similarly, if Investor B has a more favorable unlock schedule (or an ability to stake unlocked tokens), Investor A gets these benefits too.  

MFNs on token rights are sometimes hotly contested in negotiations!

Founders push back because they want the flexibility to entice Investor B with a sweeter deal on the token side (for e.g., what if Investor B is extremely deep-pocketed, bullish on the space, and is willing to invest a huge slug of capital at a very friendly valuation?). This will not be possible if they need to extend the same terms to their earlier investors too, resulting in dilution across the board.

Founders also push back because they need to give differentiated token rights to market makers, KOLs, CEX venture arms, integration partners who might bring in TVL etc. while building out the project and preparing for a successful TGE. They don’t want to give the same token rights to multiple early investors too!

Founders push back because they do not want to keep going back to a large set of early investors to waive their MFN for each such deal (reminder: every instance where the founder needs to request a waiver exposes the founder to hold-outs, re-trading, delayed responses, and similar hurdles to deal-making). They ask investors to trust their judgement and let them act in the project’s best interests.

Founders also fear that this kind of MFN can have a cascading effect in a down round - multiple early investors suddenly get more tokens and this may result in unbalanced tokenomics. 


On the other hand, early investors might be willing to live with some carve-outs to their MFN on token rights but generally insist that (as a matter of fairness) later-stage investors who take lesser risk should not get more favorable token rights.  

How should this negotiation resolve?  

In my view, early investors should be willing to live without an MFN on the token conversion ratio because their economics are protected through their own token conversion ratio (3:1 or 2:1 or whatever it may be). In other words, the absolute number of tokens they receive will not change simply because someone else is given a better deal. The absolute number of tokens an early investor receives is a function of how much dilution their equity stake suffers as the project raises funds. This means that equity valuations are the relevant metric, not token conversion ratios.  

As a result, early investors should give founders the flexibility to strike deals with more favorable token conversion ratios with other stakeholders because these “more favorable” deals usually come at the expense of the founder (thereby incentivizing the founder to be tightfisted, not generous).  

That said, early investors should not give founders the flexibility to give later investors shorter unlock periods or the ability to stake locked tokens – while it’s a subjective take, in my book this is patently unfair to early investors.  

The private funding market in crypto is volatile. The early years of a project’s life could see a bull market and a bear market in quick succession, with the founder’s negotiating leverage oscillating wildly – meaning that MFNs are often “in play”. Equity dilution, MFNs, and tokenomics are tightly correlated, so it is important for a founder to navigate this thoughtfully.

PS: Apologies for the length! Needless to add, the views I have expressed here do not reflect the views of my employer.