What founders need to know about pro rata rights

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Andy Sparks Contributor Share on Twitter 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,

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