General

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Topic: Pro Rata Rights

General guides

• How Pro Rata Works In Venture Capital Deals (Jason D. Rowley for Crunchbase News, September 2017)
• Pro rata rights (Holloway Guides)
• What all Entrepreneurs Need to Know About Prorata Rights (Mark Suster on his blog, Both Sides Of The Table, in October 2014)
• The Pro-Rata Participation Right (Fred Wilson on AVC, March 2014)
• VC Lingo: What are pro rata investment rights? (Accelerator group SOSV on its blog, August 2018)

Other Posts And Articles About Pro Rata

• Why Super Pro-rata Rights are Not a Good Deal for Entrepreneurs (Mark Suster on Both Sides Of The Table, September 2011)
• Small Funds and the Pro Rata Right (Ken Wallace writing on the blog of Industry Ventures, November 2014)

What Is Pro Rata?

• Pro rata rights typically protect investors when things go well for a company; price-based antidilution provisions protect investors when things go poorly. Conceptually, they're related though: both deal terms help shareholders at least maintain the % of a company they own as valuations change from round to round.
• Pro rata rights are a form of anti-dilution protection which grants investors the right but not the obligation to invest additional capital in subsequent rounds such that an investor can maintain their proportional stake of the company's shares as the company raises more money
• Pro rata rights are a typical term for investors to ask for in the venture deal-making process. However, they're a negotiated term; startup founders are able to deny an investor's request for pro rata rights, but this may preclude an investor from making a commitment. (Many investors' financial models and, sometimes, their LP agreements, pre-suppose pro rata rights after the first check.)
• Pro rata rights also serve to protect investors from downside events like equity cramdowns, wherein a company may issue a vast number of shares to its employees and other investors, thus diluting the equity stake of a particular investor or class of investors.
• Percentage-based pro rata rights are most common, but some investors may push for dollar-for-dollar or fixed-sum pro rata rights, which may result in super pro rata rights, granting an investor the right to increase their relative stake in a company in subsequent rounds.

Key Concepts

• Investment required to maintain pro rata stake = percent of the stake you want to maintain * number of new shares being issued * share price at new round

About The Co-Hosts

• Jason D. Rowley is a researcher and writer at Golden.com. He volunteers with startup outreach for the open-source community and sends occasional newsletters from Rowley.Report.
• Graham C. Peck is a Venture Partner with Cultivation Capital and additionally helps companies build technology development teams in partnership with Brightgrove and other technology development organizations.