What founders need to know about pro rata rights
Pro rata used to be reasonably simple. Venture investors who bought preferred shares in startups had the right to lock in a certain percentage of equity provided they continued funding the company in the future rounds of financing. But as VCs have raised ever larger funds and cap tables have become ever more congested, who gets pro rata — and who keeps it — has become a massive distraction for many founders during their fundraises.
Andy Sparks, the founder of Holloway Guides (which, as my co-editor Eric Eldon wrote this week, raised $4.6 million from the New York Times and others), writes in with an analysis of pro rata rights from the latest Holloway Guide on Raising Venture Capital. We are really digging this new model of covering the issues affecting startups, and wish Sparks and his team well in their endeavor.
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.
Which immigration headlines should you care about?
Every day in the United States, immigration issues dominate the headlines. That can be very taxing for startups, which are often founded by immigrant entrepreneurs and often have sizable immigrant employee bases as well. So which stories should you pay attention to and which stories can you ignore and live in blissful ignorance?