INSUBCONTINENT EXCLUSIVE:
Andy Sparks is the co-founder and CEO of Holloway, a publishing and technology company that creates comprehensive, practical guides
researched, written, and refined by experts. In the context of a term sheet, pro rata rights (or pro rata) govern whether investors may
continue to invest in subsequent rounds of funding in proportion with their ownership
Investors with pro rata rights can invest in the company’s next round an amount that will allow them to maintain their ownership
percentage.This is an excerpt from the Holloway Guide to Raising Venture Capital, a comprehensive resource for founders of early-stage
startups, covering technical details, practical knowledge, real-world scenarios, and pitfalls to avoid
Read our accompanying article about the company over on TechCrunch. Pro rata is Latin for “in proportion.” Most people are familiar
with the concept of prorating from dealing with landlords: if you’re entering into a lease halfway through the month, your rent may be
prorated, where you pay an amount of the rent that is in proportion to your time actually occupying the property.Almost all investors try to
negotiate for pro rata rights, because if a company is doing well they want to own as much of it as possible
After all, why not double down on a winner than use that same money to invest in a newer, unproven company? In the 2018–2019 fundraising
climate, though, it’s safe to say we’re at “peak pro rata.” Everybody wants pro rata, even those who don’t entirely understand how
it works or affects companies.Some founders include a major investor clause in the term sheet, which reserves certain rights and privileges
to those they deem “major investors,” based on amount invested or number of shares purchased
Whether to grant pro rata rights to all investors or only those above a major investor threshold is a tricky decision for two reasons.
