When raising capital, one term that often surfaces in term sheets is “pro rata rights.” These rights can have a significant impact on your company’s future rounds and your existing investors’ participation. As a founder, it’s critical to understand what pro rata rights are, how they function, and how they influence your fundraising strategy.
What Are Pro Rata Rights?
Pro rata rights (short for “proportional rights”) give existing investors the option to maintain their percentage ownership in your company during future funding rounds. This means if an investor owns 10% of your company and you raise a new round, they have the right to invest enough to keep their 10% stake.
Why Do Investors Want Pro Rata Rights?
Protect Against Dilution: It allows them to preserve their economic interest.
Signal Confidence: If an early investor believes in your growth, they may want to double down.
Maintain Influence: Pro rata ensures a consistent voice in governance as the company evolves.
Example: How Pro Rata Works
Suppose:
An investor puts in $500K for 10% of your company during a seed round.
One year later, you raise a Series A of $5M at a $15M pre-money valuation.
To keep their 10%, the investor has the right to invest ~$555K in the new round.
If they decline, their ownership will dilute based on the new cap table.
Founder Considerations
Cap Table Complexity: Too many pro rata investors can complicate future fundraising.
Negotiation Leverage: Some investors demand super pro rata rights (more than their % share).
ESOP Impact: Future allocations for employee stock options may come from the founder’s or early investors’ share.
Pro Rata in Term Sheets
Pro rata rights are usually included in the “Investor Rights Agreement.” Founders should:
Clarify the scope (only next round? all rounds?)
Define limits on super pro rata rights
Align expectations early to avoid blocking future investors
Global Fundraising Perspective
Silicon Valley: Pro rata rights are almost standard; super pro rata is less common but growing.
Europe & LATAM: More negotiable; some founders can exclude smaller investors from pro rata in later rounds.
Strategic Use by Founders
Use pro rata to reward early believers
Limit rights to key investors to streamline future raises
Balance current investor relations with long-term flexibility
How Valvian Capital Helps
We guide founders in:
Evaluating pro rata clauses in term sheets
Modeling dilution impacts of pro rata participation
Negotiating terms that enable future fundraising flexibility
Understanding pro rata rights is vital for managing your cap table and investor dynamics over time. With the right guidance, you can protect equity and growth.
Contact Valvian Capital to learn how we help founders build clean, scalable fundraising strategies.
