I’ve read that pro-rata rights mean that an investor gets to keep the same ownership percentage by investing in future funding rounds. Does it mean if a company’s raising a new round at a much higher valuation, that previous investor has the right to invest more money at the valuation he/she used before? If the right is to invest at the new higher valuation, then what is so special about that, assuming the main aim of the company then is to raise the money (whether from old or new investors)?
Questions
Do pro-rata rights mean that pre-existing investors get to re-invest at lower price even in new round at higher valuation?
6 answers from the community
A· Jul 25, 2014
It just prevents a bidding war in the next round. Yes they invest at the higher valuation.
A· Jul 25, 2014
Thanks.
A· Jul 25, 2014
Pro-rata rights just gives your current investors a chance to co-invest at the new valuation and maintain their current ownership level.
Fred Wilson explains this very well in his blog (http://avc.com/2014/03/the-pro-rata-participation-right/):
"Let’s make it concrete with an example. You invest $50k in a seed round at a $5mm cap and own 1% of the company. The next round is a $3mm round at $9mm pre, $12mm post. If you don’t participate, you will be diluted 25% and will then own 0.75% of the company. On the other hand, if you buy 1% of the round, a $30k investment, you will continue to own 1% of the company. Your “pro-rata right” in this situation is a $30k allocation in the next round."
Often a VC does not want an Angel to maintain their ownership level in a Series A/B, hence such a clause is sometimes included in your terms.
A· Jul 25, 2014
Just saw that there's also a much newer post on this by Fred. The Pro Rata Opportunity. http://avc.com/2014/07/the-pro-rata-opportunity/
A· Jul 25, 2014
I posted the first comment. I think it still amounts to an option to avoid a bidding war on a promising investment.
If you didn't have pro-rata, and the company is doing well, you'd have to compete to get in the next round.
However if you think the next round is too rich, you could decline that option and not invest.
So its just an option.
A· Jul 25, 2014
Thanks.