Software Growth

Pro rata rights

Pro rata rights let an existing investor buy enough shares in a future round to keep their ownership percentage. It is an option, not an obligation.

Pro rata rights (also called participation rights) give an investor the option to put money into your next round in proportion to what they already own, so their percentage does not shrink. "Pro rata" is Latin for in proportion. Investors are not obliged to use the right, and you are not legally required to grant it.

How to calculate it

Pulley's guide gives a version based on valuation: to keep an ownership stake, an investor invests their percentage multiplied by the post-money valuation. In its example, an angel who bought 2 percent for $200,000 at a $10 million valuation would need $400,000 in a Series A with a $20 million post-money to hold 2 percent, or would be diluted to 1.5 percent if they pass.

The more common form works on round size. If an investor owns 5 percent and you raise $2M of new money, a full pro rata allocation is 5% x $2M = $100,000.

Where it comes from

Early investors on a SAFE often get pro rata through a separate side letter. Y Combinator publishes a template, noting it gives the investor the right, not the obligation, to invest in a future priced round to maintain their percentage. Larger or more strategic investors tend to negotiate it; small ones often lack the leverage.

What it means for founders

  • It reserves part of your next round. If five investors hold rights, the sum can crowd out a new lead.
  • It signals support. Investors who exercise it show confidence; those who pass may be telling you something.
  • Track each right on the cap table so the next round is not a surprise.
  • Some investors seek "super pro rata," the right to buy more than their share. That intensifies dilution for everyone else.

Be selective about who receives it, and consider tying it to a minimum check size. This is general information, not legal advice.

Sources

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