This article discusses the concept of pro-rata rights in venture capital and startups. Pro-rata rights refer to a clause in a company’s investment agreement that allows existing investors to maintain their percentage ownership stake in the company when new investments are made.
The article explains that there are different types of pro-rata rights, including:
- Percentage basis pro-rata: This type of pro-rata right allows existing investors to maintain their percentage ownership stake in the company.
- Dollar-for-dollar pro-rata: This type of pro-rata right allows existing investors to invest a dollar amount equal to their previous investment.
- Fixed-sum pro-rata: This type of pro-rata right allows existing investors to invest a fixed sum of money.
The article also discusses the risks associated with granting super-pro rata rights, which allow investors to acquire more ownership stake than they previously held. The author argues that super-pro rata rights can create ownership conflicts and signal risk to other potential investors.
To avoid these risks, companies should be cautious when granting pro-rata rights, especially super-pro rata rights. The article recommends that companies consult with legal experts and consider the following factors:
- Ownership percentage: Companies should determine their target ownership percentage and ensure that new investments align with this goal.
- Risk perception: Companies should consider how granting super-pro rata rights may affect other investors’ perception of risk.
- Investment structure: Companies should carefully structure new investments to avoid creating ownership conflicts.
The article also provides additional resources for further reading on the topic, including articles by Mark Suster and David Beisel.
Key takeaways:
- Pro-rata rights allow existing investors to maintain their percentage ownership stake in a company when new investments are made.
- Different types of pro-rata rights exist, including percentage basis, dollar-for-dollar, and fixed-sum.
- Super-pro rata rights can create ownership conflicts and signal risk to other potential investors.
- Companies should be cautious when granting pro-rata rights, especially super-pro rata rights, and consider factors such as ownership percentage, risk perception, and investment structure.
