Term sheet clauses
Also called participation rights, pre-emption rights
A pro-rata right lets an existing investor buy enough of a future round to maintain their current ownership percentage, protecting them from dilution if they choose to keep funding the company.
An investor holding 8% with a pro-rata right can purchase 8% of the next round at the same price and terms as new investors. Exercising it keeps them at 8%; declining lets them dilute like any other holder.
The right is valuable precisely when a company is doing well and the next round is competitive, because that is when new investors want the whole allocation and existing holders would otherwise be squeezed out.
Pro-rata rights granted broadly at seed can leave little room in a Series A once every small holder exercises. Lead investors in the new round often want a minimum ownership target and will ask for existing rights to be waived or capped.
Many seed investors accept a major-investor threshold, so only holders above a certain stake keep the right. Some funds treat pro-rata as their central strategy and will negotiate hard for it.
They are common but not universal, and are increasingly limited to major investors above a defined ownership threshold rather than granted to everyone in the round.
Contractually yes, if the right is drafted without carve-outs. In practice lead investors in a hot round often ask existing holders to waive or reduce them.
A right to buy more than the investor's current percentage in the next round. Founders should resist it, since it lets one investor crowd out both new investors and other existing holders.
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