#SUPER PRO RATA PRO#
Pro rata rights are one of the most important terms in VC deals. In the event that pro rata rights are extended to an investment vehicle offering on MicroVentures’ platform, there may be circumstances in which those rights can be passed along to those who invest in that vehicle. More simply put, we pool many smaller investments to make one large investment. When investors invest through MicroVentures, they’re not investing directly in a private company rather, they’re investing in an LLC that invests on their behalf. Understanding Terms: Liquidation Preference Benefits of Investing in an LLCĪs mentioned, pro rata rights are typically only extended to large and institutional investors, meaning smaller investors miss out on the benefits. That $20,000 allocation is the investor’s “pro rata right” for that round. If the investor does participate in round two, investing in 1% of the round ($20,000), they will maintain their 1% ownership of the company. If the investor chooses not to participate in round two, they will be diluted, and their percentage of ownership will drop below 1%. The next round of funding is a $2 million round with an $8 million pre-money valuation and a $10 million post-money valuation. Imagine that investor has committed $30,000 to a company in a Seed round with a $3 million valuation, effectively giving the investor 1% ownership in the company. $ Needed to Maintain Pro Rata Stake = % Stake to be Maintained X # of New Shares Issued X Share Price at New Roundįor more a more hands-on approach, consider this example: Determining Pro Rata Allocationĭetermining how much an investor needs to invest in the next round to maintain their pro rata stake is fairly straight-forward: This can make it difficult to attract new investors because there might not be enough left to entice them.
#SUPER PRO RATA SERIES#
For example, an investor that owns 25% equity following a Series Seed round might request to purchase as much as 50% in the Series A round. Some investors may request pro rata rights that provide them with some percentage beyond their pro rata share. A potential pitfall would be that should an investor choose not to exercise their pro rata rights, it could signal trouble to potential investors.Īnother thing startups should be cautious of is the granting of “super” pro rata rights. The obvious upside being there’s less uncertainty about who will invest in the next round. While investors are not obligated to utilize their pro rata rights, for companies who are performing well, pro rata rights may incentivize early-investors to keep investing in subsequent rounds as the company continues to grow. Equity Dilution in Startups How Pro Rata Rights Affect Startups For investments that have performed well, institutional investors want to be able to make follow-on investments. Institutional investors also use pro rata rights as a way to manage investment risk. By investing in follow-on rounds, investors are able to avoid being diluted as the company grows. When this happens, the percentage of equity stake of current investors becomes diluted. With every new round of financing, new shares are issued. Oftentimes, pro rata rights are a non-negotiable term for institutional investors. If a company does not perform well, investors may not use their pro rata rights.
Investors who have pro rata rights are not obligated to invest in future rounds and may use it at their discretion. Pro rata rights aren’t always granted and are usually only given to larger investors or institutional investors who invest at an early stage. Pro rata rights are also sometimes referred to as “participation,” “preemptive”, or “right of first offer/refusal” rights.
This allows investors to maintain their percentage of ownership in a company, and pro-rata rights become especially important as the company grows.
“Pro rata” is a Latin term that translates to “proportionately.” In the VC world, a pro rata clause is an investment term that gives investors the right to participate in subsequent rounds of funding. This week, the term we’re exploring is very important on both sides of the table but is of particular interest to investors: pro rata rights. We’ve discussed term sheets a lot in the past, particularly from the perspective of founders.
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