From time to time, we receive questions from new angel investors asking about specific terms in investment agreements and how they apply when triggered. To address these inquiries, we have a series of articles on “Understanding Deal Terms“, explaining the key investment terms. Whether you’re new to investing or just need a refresher, we hope you’ll find this series useful in understanding deal terms.
What Are Pro-Rata Rights?
Pro-rata rights, also known as participation rights, are provisions in investment agreements that allow investors to maintain their ownership percentage in a startup during future financing rounds. This means that if an investor owns a certain percentage of the startup, they have the right to buy additional shares in subsequent rounds to maintain that same percentage of ownership.
Example: Imagine an investor owns 10% of a startup. If the startup raises additional funds in a Series B round, issuing new shares, the investor has the right to purchase enough of those new shares to maintain their 10% ownership. If the startup issues 1 million new shares, the investor can buy 100,000 of those shares to avoid dilution.
How Pro-Rata Rights Work
Pro-rata rights typically allow investors to buy new shares at the same price as the current funding round. This means that if the company is doing well and the valuation increases, the investor has the opportunity to invest more at the new, higher valuation to maintain their ownership percentage.
However, pro-rata rights are not automatic; investors must decide whether to exercise them during each new funding round. If an investor chooses not to participate, or take up less than pro rata, then their ownership percentage will be diluted.
Different Variations of Pro-Rata Rights
Pro-rata rights can vary depending on the terms of the investment agreement. Here are some common variations:
- Super Pro-Rata Rights: These rights allow investors not only to maintain their ownership percentage but also to increase it during future rounds.
For example, an investor with 10% ownership might have the right to increase their stake to 15% by purchasing more shares than their pro-rata allocation. - Limited Pro-Rata Rights: In some cases, pro-rata rights may be limited to specific rounds or have a cap on the amount of additional shares that can be purchased. This helps balance the interests of early investors with the needs of the company to attract new capital.
- Pay-to-Play Pro-Rata Rights: This variation requires investors to participate in future rounds at their pro-rata level to maintain their preferred stock status. If they do not, their shares may be converted to common stock, which typically has fewer rights.
Join Us for a Deeper Dive into Deal Terms
If you’re interested in gaining a more comprehensive understanding of pro-rata rights and other deal terms, don’t miss our upcoming AngelCentral MasterClass Series: Implications of Deal Terms Using Real World Case Studies on 19 July 2025 (Saturday).
This workshop will provide you with practical insights into how these terms are applied in real-world scenarios, equipping you with the knowledge to understand the implications and negotiate effectively.
This post is a part of the series of “Understanding Deal Terms“, find out more about the explanation of other deal terms:
