Most-favored-nation rights in Dutch bridge rounds and venture financings

MFN clauses are common in convertible loans, SAFE-like instruments, bridge rounds and side letters. An MFN clause gives an investor the right to benefit from certain better terms granted to another investor at a later stage.

For international investors, the concept is familiar. For Dutch startups, the implementation requires care. MFN rights can affect conversion mechanics, valuation caps, discounts, pro rata rights, side letters, future equity rounds and the fully diluted cap table.

In Dutch venture financings, the key question is not only whether an MFN clause is acceptable. The key question is what terms are covered, when the right is triggered and how the adjustment is implemented when the instrument converts into shares.

This article is part of ViottaLaw’s Dutch VC Insights and connects to Side Letters in Dutch Venture Financing Rounds, implementing US-style VC terms in Dutch venture financings, Dutch implementation of US-style investor rights and US VC Terms & Dutch BV Structures.

What is an MFN clause?

MFN means most-favored nation. In venture financing, it usually means that an investor may elect to receive certain better terms later granted to another investor.

For example, an early bridge investor invests through a convertible loan with a 20% discount. A later bridge investor receives a 25% discount and a lower valuation cap. Depending on the drafting, the earlier investor may be entitled to adopt those more favorable terms.

The effect depends entirely on the clause. Some MFN clauses cover only economics. Others may extend to information rights, pro rata rights, conversion rights, side-letter protections or other investor rights.

For Dutch implementation, that distinction is critical.

Why investors ask for MFN protection

An MFN clause protects an investor who supports the company early, often before pricing is clear.

This is especially relevant in bridge rounds. The company needs capital quickly. A priced round may be delayed. The valuation may be uncertain. The investor wants protection against a later investor receiving materially better bridge terms.

For founders, an MFN clause can help close the first bridge investment without over-negotiating every possible future term. But that works only if the clause is narrow enough not to create uncertainty in the next round.

What terms should be covered?

The most important drafting point is scope.

Does MFN apply only to discount, valuation cap, interest and maturity? Or does it also apply to conversion triggers, repayment rights, information rights, pro rata rights, warrants, consent rights and side letters?

A broad MFN clause may look investor-friendly, but it can create later friction. If a strategic investor receives a confidentiality arrangement, should that be replicated for earlier investors? If a fund receives a reporting right due to its mandate, should every MFN investor receive that right as well?

In professional Dutch venture documentation, MFN rights should usually distinguish between economic bridge terms and governance or information rights.

MFN in convertible loans

In convertible loans, MFN clauses usually affect the terms of future conversion into shares.

Relevant terms include valuation cap, discount, qualified financing threshold, maturity date, interest, change of control treatment and repayment rights.

The clause should define the trigger. Does MFN apply only to later convertible loans? Does it apply to SAFE-like instruments? Does it apply to an equity round? Does it apply only before the next priced round or throughout the life of the instrument?

In a Dutch company, conversion ultimately requires implementation through share issuance or another equity mechanism. If MFN changes the conversion price or share entitlement, it may affect shareholder approvals, pre-emption rights, Dutch notarial execution and the shareholders’ register.

MFN in SAFE-like instruments

SAFE-like instruments are designed to facilitate fast financing without immediately pricing the round. That is why MFN clauses are often used.

The difficulty is that SAFE-like instruments do not always operate like classic debt. There may be no interest, no repayment date and no conventional maturity. The instrument may convert on a future financing, exit or other trigger.

An MFN clause should therefore be drafted to fit the instrument. It should not leave open whether a later instrument is “better” simply because it has a different structure.

This matters for international counsel because Dutch implementation often requires converting the economic concept into a concrete share issuance framework.

How MFN complicates later VC documentation

MFN rights often become visible only when the next institutional round is negotiated.

A new lead investor will want clarity on the cap table, conversion of existing instruments, pre-money valuation, option pool, preference shares and investor rights. Existing MFN investors may then claim better terms from later instruments. That can delay the round or change the dilution outcome.

Before a Series A or other priced round, the company should prepare an MFN schedule. It should identify each MFN investor, the relevant document, covered terms, trigger, expiry and effect on conversion.

For foreign investors and lead counsel, this schedule is an important diligence item.

Practical conclusion

MFN clauses can be useful in Dutch bridge rounds and SAFE-like investments, but they must be drafted with future rounds in mind.

The commercial objective is fair: early investors should not be disadvantaged if later bridge investors receive better economic terms. The legal implementation should be precise: define covered terms, trigger events, expiry, election mechanics and effect on Dutch share issuance.

FAQ

What does MFN mean in venture financing?

MFN means most-favored nation. It gives an investor the right to benefit from certain better terms granted to another investor later.

Are MFN clauses common in bridge rounds?

Yes. They are often used in bridge financing, convertible loans, SAFE-like instruments and side letters.

Can MFN rights affect dilution?

Yes. If an MFN clause improves conversion terms, earlier investors may receive more shares on conversion.

Should MFN apply to governance rights?

Not automatically. Economic terms and governance or information rights should be distinguished carefully.

Why does Dutch implementation matter?

Because MFN adjustments may affect share issuance, pre-emption rights, shareholder approvals, notarial execution and the Dutch cap table.

About Dirk de Waard

Dirk de Waard is a Dutch corporate, M&A and venture capital lawyer and partner at Venture Lawyers in Amsterdam. He advises founders, Dutch startups, international investors, VC funds and counsel on convertible loans, SAFE-like instruments, bridge rounds, side letters, MFN clauses and Dutch venture financing documentation.

ViottaLaw is Dirk’s personal insights platform. Legal services are provided through Venture Lawyers.

Need to review MFN rights in a Dutch bridge round?

An MFN clause should protect investors without creating uncertainty for the next financing round.

Dirk de Waard advises founders, investors and international counsel on MFN clauses in Dutch convertible loans, SAFE-like instruments and side letters. Contact Dirk at dirk.dewaard@viottalaw.com to review the Dutch implementation of MFN rights before closing.