There are many important terms that crop up in early stage, unpriced rounds, convertible notes, and SAFEs. One of these is a most favored nation clause. A most favored nation, or MFN clause allows early investors to request and receive identical provisions or rights included in later rounds, particularly if they're considered favorable. This is generally a term included in SAFEs, but not convertible notes, because they lend themselves more to a fundraising process on a rolling basis, whereby investors capital does not come in at the same time. SAFEs lend themselves to this. Imagine a situation where three investors invest in an early stage company at different times, each receiving a different reward. Investor A may have a discount rate, investor B may have a valuation cap, and C, who joins last has both.
Investor C has the best deal as they can choose, the better of the two options, the discounts or the valuation cap. But if investors A and B also have a most favored nation clause in their SAFE, then they would receive the same terms as investor C.
They would also be able to choose the better of the two options, even though they didn't get that right when they invested themselves. The most favored nation clause would've given them identical provisions as those offered to investors in investors seizes funding round. So it allows them to choose between the discount rate and the valuation cap, whichever is best as this has been offered to the later investor. C. This is a benefit of SAFEs. SAFEs aren't locked into a fixed valuation or timeframe, so can be used on what's known as a rolling basis. They will stop being used once a company valuation is agreed.
