Fundraising Jargon 07: Pro-Rata Rights

The term pro-rata gets thrown around a lot during financing discussions, often in different contexts. Pro-rata is Latin for “in proportion." Replacing the Latin with its English equivalent is helpful in deciphering its meaning in legal documents.

Pro-rata rights refer to the right of investors to participate in later funding rounds so they can maintain the amount of equity they own in a company. Let’s say that a company raises an INR 5Cr Series A round from an investor at an INR 20Cr post-money valuation, leaving that investor with 25% of the company. In a later round, the company raises INR 10Cr at an INR 100Cr valuation. To maintain a 25% stake, the investor needs to throw in at least 25% of the new funding, or INR 2.5Cr, otherwise their stake in the company will be reduced proportionately. Pro-rata rights obligate the company to leave space in subsequent funding rounds so investors can avoid such dilution.

Subsequently, we also have "super pro rata rights” which allow investors to increase their equity stake in subsequent funding rounds. Super pro rata rights are a right of first offer to purchase up to 50% of the total amount of the next round raised. 

Super pro rata rights pose a few unique advantages and disadvantages to founders and investors alike. They effectively prevent other investors from participating in later rounds. Having more investors in a company prevents a greater number of investors from supporting competitors, gives the entrepreneur more networks and more expertise to lean on, and prevents any one investor from having too much control in a company. Super pro rata rights pose an advantage to entrepreneurs in that they effectively guarantee a significant portion of the next financing round being raised. This lessens the often-vast amount of time entrepreneurs spend fundraising, giving founders more time to focus on building the company.