Deal Terms
Pre-Emption Right
An investor's right to maintain their ownership percentage by investing in future rounds before new investors.
Pre-emption rights (also called pro-rata rights or participation rights) give existing investors the right to invest in subsequent financing rounds to maintain their ownership percentage. These rights are contractual and included in investment agreements. In competitive rounds, exercising pre-emption rights can be challenging if the round is oversubscribed and new investors want the full allocation.
In Practice
A seed investor who owns 10% has pre-emption rights. When the company raises a $20M Series A, the investor can invest $2M to maintain their 10% stake, even if the Series A lead wants the full round.
Why It Matters
Pre-emption rights are one of the most valuable rights for early-stage investors. The ability to maintain ownership in breakout companies can dramatically impact fund returns.
Related Concepts
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