This is one of the more complex but potentially very important aspects of early stage investing. Pro-rata rights help ensure that as an early investor in a company you have the option to maintain your equity stake as the company raises more capital.
Let’s say you acquired 10% of a company that was valued at $10 million post money in 2015. The following year, the company starts to really take off, and decides to raise $10 million at a $40 million dollar pre-money valuation. Without pro-rata rights, the company or its new investors could refuse to let you participate in the round, and your stake in the company would diminish from 10% to only 4%, significantly reducing your potential return if you believed this company had the potential to reach a billion dollar valuation.Read More