Deal Terms
What is a pro-rata right?
Quick Answer
A pro-rata right gives an existing investor the right (not obligation) to invest in future funding rounds to maintain their ownership percentage. It's one of the most valuable investor rights, especially for early-stage investors in breakout companies.
Detailed Answer
Pro-rata rights (also called preemptive rights or participation rights) allow existing investors to invest additional capital in subsequent rounds to prevent dilution of their ownership stake.
How it works: If an investor owns 10% of a company and the company raises a new round, the pro-rata right entitles them to invest enough to maintain their 10% ownership after the new shares are issued.
Why pro-rata matters: - **For investors** — The best returns in VC come from doubling down on winners. Pro-rata rights ensure access to follow-on rounds in breakout companies. - **For founders** — It's generally neutral. Having existing investors participate signals confidence to new investors.
Common structures: - **Major investor pro-rata** — Only investors above a threshold (e.g., $250K) get the right - **Super pro-rata** — The right to invest more than your pro-rata share (rare, highly sought) - **SAFE pro-rata** — Some SAFEs include pro-rata side letters
When pro-rata becomes contentious: - Hot rounds where new investors want the full allocation - Down rounds where existing investors may not want to invest more - Later stages where too many pro-rata holders fragment the round
Related Questions
What is a SAFE (Simple Agreement for Future Equity)?
A SAFE is an investment contract created by Y Combinator where an investor provides capital to a startup in exchange for the right to receive equity in a future priced round, with terms like a valuation cap and/or discount rate.
What is a term sheet?
A term sheet is a non-binding document that outlines the key terms and conditions of a proposed investment, including valuation, investment amount, board seats, liquidation preferences, and protective provisions.
What is a liquidation preference?
A liquidation preference gives preferred shareholders (investors) the right to receive their investment back before common shareholders in an exit. The standard is 1x non-participating, meaning investors get back their investment amount or convert to common stock — whichever is higher.
What is a convertible note?
A convertible note is a short-term debt instrument that converts into equity at the next priced round, typically with a valuation cap, discount rate, interest rate (2-8%), and maturity date (12-24 months).