Recently, I got to talking with a founder.
Seasoned operator, but first-time founder.
“Letter of Intent”-type documents, but no revenue.
Located in a city, but not a tier-1 startup city (i.e. not NYC or SF).
A lot of potential, but things were going a bit slower than he’d hoped for.
Naturally, accelerators became the topic of conversation: YC? Techstars? Others?
But then he dropped a bomb on me:
There were 2 angels on the cap table with MFN status.
If you haven’t heard of MFN’s, Propel(X) has a pretty good write up:
A Most Favored Nation clause, or MFN clause as it is commonly known, protects an investor by giving them the same rights and benefits received by later investors, if those rights and benefits are more favorable than those originally agreed.
In principal, it sounds fair enough.
But, here’s the rub:
What if that company decides to join an accelerator a bit down the line?
YC’s standard deal includes $125,000 for 7%, effectively valuing the company at ~$1.79MM.
Would the previous angel investors get that same valuation?
Even if they could only provide a fraction of the value that YC might be able to?
Here’s how that scenario could play out:
(If) YC is interested in your company and calls you in for an interview.
Things are going swimmingly until you mention your cap table.
Your interviewer writes you off in their mind…
While politely steering the conversation to an end.
After all, YC only has room for 3 out of every 100 startups that apply…
So, any – even potential – hiccup they see = rejection pile.
Instead, you could use the MFN to your advantage:
Approach your angels before the YC interview.
Ask them to waive MFN status, should your company gain acceptance to YC.
Chances are, they’ll be thrilled to do so.
Because getting into YC is generally great for long-term growth potential.
Now, if your cap table comes up at the YC interview…
Not only will it be a non-issue.
You also have the opportunity to look like a proactive founder who’s on top of it,
With the backing of supportive investors.
Lemons…meet lemonade.
