If FastCapital doesn’t exercise its option to invest, its ownership will decrease to 2% (50k / 2.5M). Since each share is $4, FastCapital’s pro rata allocation is $50k. That means FastCapital needs to buy 12.5k shares (62.5k - 50k). To maintain that same level of ownership, FastCapital will need to hold a total of 62.5k shares after the Series A (2.5% * 2.5M shares). The pro rata rights agreement stipulates that FastCapital can invest “up to an amount required to maintain its exact ownership % in the company.”įastCapital’s ownership prior to the Series A was 2.5%. The company is raising a total of $2M, issuing a total of 500k new shares.įastCapital has the option to invest in this Series A. So the price for each share that is being issued now is $4 ($8M / 2M shares). The pre-money valuation of this Series A is $8M. The company has been doing well over the past year. One year later, Widgets' founder decides to raise more capital as part of a Series A. The founder of Widgets awards FastCapital pro rata rights to participate in the next financing round. Since each share is $2, FastCapital receives 50k shares and thus owns 2.5% of the company (50k shares divided by 2M shares). The firm FastCapital VC invests $100k in the seed round. The company is now raising a total of $1M, issuing a total of 500k new shares. So the price for each share of the company’s stock is $2. Prior to the seed round, the company had issued 1.5M shares. raises a seed round at a $3M pre-money valuation. There are various flavors of pro rata rights and how much allocation an investor may receive is dependent on what exactly the pro rata rights agreement says. How to Calculate Allocations Resulting From Pro Rata Rights Pro rata rights are simply meant to guarantee an investor an allocation if they would like to invest it. investors that have invested a major portion of the company’s overall financing).Ĭompanies can raise capital from both investors who have pro rata rights, as well as from existing or new investors who do not have those rights. In later-stage companies, pro-rata rights are generally awarded to “major investors” (i.e. Some investors may make the receipt of pro-rata rights a prerequisite to investing in the first place-others may not.Įarly-stage companies may grant pro-rata rights to investors who are particularly helpful in an attempt to incentivize them. Pro rata rights represent an agreement between an investor and a company, whereby the company provides the investor the right-but not the obligation-to participate in one or more future rounds of financing.Ĭompanies typically award these rights to select (not all) investors. In this post, we’ll explain what pro rata rights are, how they work, and why investors care about them. a board seat, information rights, voting rights). They want to keep other rights that are dependent on their ownership stake (e.g.They believe the company will do well in the future so more ownership will result in greater returns.Dilution is not necessarily a bad thing, but GPs may want to avoid it if: By participating in subsequent rounds, GPs can prevent their percentage ownership stake in a company from decreasing (often referred to as “dilution”). Pro rata rights give GPs the option (but not the obligation) to invest in a company’s subsequent round(s) of financing. To do this, it can help to have pro rata rights. And as those startups mature and raise additional rounds of funding, some GPs want to invest in these subsequent rounds in order to maintain-or even increase-their ownership stake. Whether or not to exercise your pro rata rights is a matter of strategy: some investors always participate in follow-on rounds, while others deliberately choose not toĮvery day on AngelList, fund managers (known as general partners or "GPs") are making early-stage investments into startups.Pro rata rights allow investors to maintain their ownership stake in a startup as it grows.Pro rata rights give an investor the right to participate in one or more future rounds of financing.
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