The Soft Circle Clause VCs Slip Into Term Sheets

Episode notes

This episode drills into a specific, controversial term sheet clause that's increasingly appearing in Series A and B rounds: the 'soft circle' or 'MFN' (most favored nation) provision. Lucas and Luna break down how this clause allows later investors to retroactively match the terms of earlier investors, effectively giving the lead VC an option to reprice the round after seeing all other commitments. Using a real example from a 2025 deal that recently surfaced in SEC filings, they explain why some founders and lawyers call it a 'poison pill in disguise,' while VCs argue it provides flexibility in uncertain markets. They also connect it to current market conditions, referencing the recent SpaceX IPO and the surge in ARK Innovation ETF, suggesting that in a frothy environment, such clauses may become more common as VCs hedge their bets. The hosts discuss the typical language, how it differs from a standard pro rata right, and the three questions every founder should ask before signing.