What is Pro Rata Rights?

Pro Rata Rights are a clause in a funding term sheet that gives an investor the right, but not the obligation, to participate in a company's subsequent funding rounds to maintain their ownership percentage.

Base Term for Startups: For founders, granting pro rata rights is a standard part of venture capital deals. It allows your most supportive early investors to continue investing as you grow. However, it can also make it more complex to bring new investors into later rounds.

For Investors: Pro rata rights are highly valuable. They ensure that if a portfolio company becomes very successful, the early investor is not diluted down to an insignificant stake and can "double down" on their winners.

Base Term Example: An angel investor owns 5% of a startup after the seed round. The startup is now raising a Series A. The investor's pro rata right allows them to invest enough new money in the Series A to maintain their 5% ownership stake.