Fundraising · Angel investor

What’s the deal with prorate rights for startup investors?

David Feldman Data Analyst at Scribd

February 13th, 2015

In starting to raise a seed round I've heard some murmurs about prorata rights (the right to invest in us at a later stage to keep their percentage). It seems like a no-brainer to me to allow this. Is there any reason I wouldn't want to allow this? And where does the conflict come in with later stage investors?

Jacob Kojfman Experienced technology and corporate lawyer, focusing on SAAS

February 13th, 2015

It's more of a no-brainer for the investor as they won't get diluted. Reasons why you don't want to allow it: 1. Investors that do not have pro-rata rights will continue to be diluted so unless you have a solid shareholders' agreement/multiple voting rights for founders, founders may get diluted; 2. Larger investors that may come in may also want it; 3. Investors later may shy away from investing in you because their stake will not be as large as they expect it to be if previous investors exercise their pro-rata rights. 

Jack Smith Entrepreneur & startup advisor

February 13th, 2015

potential disadvantage: it can often be a headache trying to fit everyone in to later funding rounds, as the pro-rata will often be significantly larger than the investor's initial investment.

Jack Smith Entrepreneur & startup advisor

February 13th, 2015

@Todd I have no idea what you're trying to describe here. But that isn't really how pro-rata rights work.

you can read up here: http://avc.com/2014/03/the-pro-rata-participation-right/ but it has nothing to do with getting a future allocation at an "old valuation", that's not even possible from a tax perspective.

Richard CSO Sales Process | Operational Optimization

February 14th, 2015

The clause would need to be exercised to potentially have any effect on future investors. The only concern is future investors may want a percentage they are trying to achieve and would need to know the intentions of the "rights" hodlers before investing. Other than that, the sweetener simply means potential additional $ from committed investors. Interest from future investors, however, may also stimulate a "rights" exercise to maintain a percentage parity... it may also work in your favor!!!