Glossary - Pro-rata Rights
Pro-rata rights are contractual agreements that allow investors to maintain their percentage ownership in a company by participating in future financing rounds. These rights enable investors to buy shares in future rounds of funding before new investors, ensuring that their shareholding isn't diluted.
Also known as
- Pre-emptive rights
- Subscription rights
- Anti-dilution rights
Use cases examples
- Term Sheet: The investor shall have pro-rata rights to participate in future financing rounds to maintain their percentage ownership in the company.
- Shareholders' Agreement: Pursuant to the pro-rata rights clause herein, existing shareholders are entitled to purchase additional shares during any new equity financing round to keep their current ownership percentage intact.
Considerations for investors
- Investors should assess whether exercising pro-rata rights aligns with their investment strategy and portfolio balance, considering the additional capital requirement.
- It's crucial for investors to understand the specific terms and conditions associated with pro-rata rights, including any time limits or thresholds for participation.
Considerations for founders
- By granting pro-rata rights, founders may limit the amount of new investors they can bring on in future rounds as existing investors have the option to maintain their ownership.
- Founders should carefully consider the long-term implications of pro-rata rights on company control and the investor base composition.
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