Pro rata rights let an investor buy into future rounds to keep its ownership percentage. They are among the most requested terms at seed, and one of the most common sources of confusion in later rounds, because they are often granted in side letters that nobody tracks.
How pro rata works
If an investor owns 5% of the company and the company raises a new round, a pro rata right lets it buy enough of the new shares to stay at 5%. Rights may be limited to "major investors" above a set investment size, and they usually apply only to the next priced rounds.
Where they come from
- Priced rounds: usually in the investors' rights agreement.
- SAFEs and notes: often in a side letter, since the standard documents do not include them.
What side letters can contain
- Pro rata rights and information rights (financial statements, updates).
- Board observer seats.
- Most-favored-nation clauses.
- Specific promises about use of funds or approvals.
Why it matters in the next round
A new lead investor wants to know how much of the round is already spoken for. If early investors hold pro rata rights that were never tracked, the round can be oversubscribed before it opens, or rights may need to be waived.
What to check
- A single list of every investor's rights, from every agreement and side letter.
- Thresholds and expiry: which rights survive into the next round.
- Any MFN terms that extend one investor's rights to others.
This guide explains how these terms commonly work. Documents vary, and yours control. Talk to a lawyer before you sign.