Most Favoured Nation and Information Rights under the CARE

Most of the other articles in this series focus on the CARE’s conversion mechanics and related economic terms, including how these are impacted by the CARE’s deal terms (i.e. Discount Rate, Minimum Equity Raise, Multiple, Maturity Date and Maturity Cap).  There are, however, a few other important standard provisions that are not directly impacted by the deal terms.  These are the MFN, the investor’s information rights and the Representations and Warranties.

Most Favoured Nation

The CARE includes an ‘MFN amendment‘ clause, more fully a ‘most favoured nations’ clause.  The name originates from international political and economic relations.  The country benefiting from the MFN protection has to be treated the same (e.g. equal trade tariffs) as the ‘most favoured nation’, i.e. the country with the most favourable terms.  This helps to ensure non-discriminatory trade between the countries.  In this context, though, the MFN amendment clause aims to avoid discrimination between CARE investors (e.g. offering some a preferable Discount Rate and/or Multiple).

If, after signing a CARE, the company enters into another CARE (or similar agreement) it must notify the initial CARE investor and provide them with all information related to that subsequent investment.  The initial investor then decides whether, in their opinion, the terms of the subsequent CARE are preferable to their own CARE.  If they think the terms are preferable, they have a right for their CARE to be replaced by the same terms as the subsequent CARE.

Notably, the MFN can only be used for a wholesale replacement of the entire CARE.  The initial investor cannot pick which terms it thinks are preferable and only take those.  They either accept the new CARE terms in their entirety, or stick with their original CARE.  Importantly, if an investor opts for the new CARE, and that new CARE does not have an MFN amendment clause, the investor would lose this right of replacement for any subsequent CARE issued by the company.

Although the MFN amendment clause is included in the CARE by default, that does not mean it must stay in the document.  Most versions of Y-Combinator’s SAFE (Simple Agreement for Future Equity), on which the CARE was originally based, do not include an MFN clause.  It would be in the company’s interest to remove this for administrative ease and to ensure it retains autonomy when negotiating future CAREs.  The fact that this is a standard clause, and it seems somewhat reasonable, may mean it is difficult to negotiate out of a CARE.

Information Rights

The CARE investor is expected to become a shareholder in the company.  To reflect this, and to help protect their investment, the CARE gives the investor a right to request information about the company’s business and prospects, financial condition, properties, operations and investments. 

This information right is quite broad and potentially wider than the investor would have even after becoming a shareholder.  To combat this, the CARE provides that:

  • firstly, any request must be reasonable;
  • secondly, the company has 30 days to consider and respond;
  • thirdly, the company need not disclose any trade secrets or highly confidential information; and
  • finally, the investor can only use the information to evaluate their investment and not for any other purpose.

This information right is reactive rather than proactive.

The company only needs to respond to a request from an investor; it does not need to initiate any information sharing.  This is different to the MFN clause mentioned above, where the company has to proactively inform the investor of any subsequent CARE-type investments.

While this may be the case it can, of course, be good for the company to proactively share at least some information with a CARE investor (assuming it can be shared and with confidentiality measures in place).  After all, the investor is intended to become a shareholder at some point and it may not form the base of a great relationship if the investor feels they’ve been kept out of the loop on any major developments.