How Pro Rata Rights Shape Your Startup’s Future: A Founder’s Guide to Smart Fundraising
- Stephanie Pflaum
- 3 hours ago
- 7 min read
Updated: 14 minutes ago
A subtle yet high-stakes dynamic of startup fundraising that's often overlooked by founders is who stays by your side when you raise your next funding round. If your early backers are unable (or unwilling) to double down through subsequent funding rounds, your cap table and investor alignment can change in ways you didn’t anticipate.
According to PitchBook, a new breed of “pro rata” funds is stepping into the void left by Seed-stage investors who simply don’t have the capital to follow on. These specialist funds create an alternate route for liquidity-constrained investors with pro rata rights—one that you’ll want to understand as you negotiate term sheets and plan for future fundraising.
Pro rata rights can materially affect:
How later funding rounds work,
How investors perceive you, and
How your cap table evolves.
We unpack what pro rata rights mean for you as a founder, from equity dilution to long-term control and alignment, to give you a clear understanding so you can head into funding negotiations confidently.
USEFUL DEFINITIONS
A pro rata right gives an existing investor the option to invest in future rounds in order to maintain their ownership percentage. For example, if an investor owns 10% after your Seed round and you raise a Series A, they can buy enough new shares to stay at 10% despite dilution from new investors.
A pro rata fund is a newer kind of investment vehicle: it raises capital specifically to back early investors with pro rata rights so they can still participate in later rounds.
What Are Pro Rata Rights?
"Pro rata" means proportional. When VCs put pro rata in their term sheets, they're reserving the right to buy more shares in a portfolio company during future funding rounds to maintain their ownership percentage and avoid dilution. In other words, pro rata rights help investors keep their slice of the equity pie as the pie gets bigger.
The Problem with Pro Rata
While pro rata rights provide added incentive for early-stage investors and are generally beneficial to founders that need capital, they do have some drawbacks that can impact fundraising down the road.
Conflicting goals
In later funding rounds, the new lead investor usually gets its preferred equity allocation. Other new investors try to get what they can while existing investors have to pony up whatever the lead has agreed to pay per share if they want to exercise their pro rata rights. Meanwhile, founders want to cap the total chunk of their company they will sell in the round to minimize ownership dilution. Pro rata investors often get squeezed out of the round altogether when the deal is all said and done.
Vibes
Whether or not existing investors choose to exercise their pro rata rights can send mixed signals to new investors. Exercising pro rata rights shows new investors that your early backers are still committed and believe in your startup’s potential. Choosing not to exercise pro rata rights can have the opposite effect—suggesting early investors lack confidence in your company’s future.
Overcrowding
If you have multiple investors who all choose to exercise their pro rata rights, that can cause another complication. There are only so many shares to go around—new investors might pass on the deal if early investors crowd them out and they can’t reach their equity target. If you do get a deal done in this scenario, you can expect your ownership and equity to shrink significantly.
Pro Rata Funds On the Rise
New investors in later rounds tend to run bigger funds than angel and Seed investors and they can pay more per share. That makes it tough for early-stage investors and smaller funds to keep participating in later rounds. With fewer deals being done at later stages—and startup valuations on the rise—it’s even more challenging for cash-strapped investors to get access to those big-ticket deals.
Enter the pro rata fund. These specialty funds are set up to help early-stage investors exercise their pro rata rights.
Jesse Bloom, a partner at SaaS Ventures, told TechCrunch, “If a company is destined to IPO, at some point down the line, pro-rata will become too large for existing investors to fill and they get left behind, so I give them fast and easy capital to continue investing in their winners.”
Founders should be aware of this fundraising scenario, since it can add complexity into later stage funding deals and potentially let anonymous investors sneak in through the back door.
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How to Keep Pro Rata Rights in Check
Think of pro rata like season ticket holder privileges—your most loyal fans get first dibs on seats while you maintain a flexible inventory of seats for single-game sales. Similarly, as a founder you have to balance incentives for investors at different stages, keep good options on the table for later funding rounds, and manage dilution when negotiating pro rata rights.
Before we get into specific pro rata negotiation tactics, you'll need a north star for the outcomes you want to influence. That north star is your cap table.
Here's how you maintain a well-balanced cap table with pro rata in play:
1. Keep it clean
If every early-stage investor has pro rata rights, you risk over-crowding your cap table and that can make it harder to attract and close new investors later. So you'll want to be selective when granting pro rata rights.
Limit pro rata rights to major investors, such as those who invest over $250,000.
Beware of super pro rata rights—don’t let early investors negotiate the right to invest more than their fair share and increase their percentage of ownership in later rounds.
2. Understand the downstream impacts
It’s a useful exercise to map out potential funding rounds and look at how pro rata participation and different limits or restrictions might affect equity shares after each round. You’ll see instantly how pro rata rights change dilution—it can also be a powerful negotiation tool.
Example
Let’s look at a cap table scenario that shows how pro rata rights play out over multiple rounds.
The following example shows what happens from Seed to Series A to Series B when:
A Seed VC has pro rata rights (they maintain their 10%).
An early angel does not (their 2% shrinks over time).
New Series A and Series B investors come in with large checks.
You can clearly see how pro rata rights let the Seed VC protect their ownership while the angel gets diluted; and you, the founder, gets squeezed more each round.
Let’s visualize the breakdown of dilution across rounds.
You’ll notice:
The Seed VC’s slice stays steady (thanks to pro rata rights).
The angel investor’s slice shrinks without pro rata.
The founder's shares get squeezed each round as new investors come in.
Negotiating Pro Rata Provisions
It’s your job to prevent pro rata rights from becoming a bottleneck to future fundraising and growth, and to avoid over-diluting your ownership.
Your goal? Limit pro rata rights to maintain balance and optionality in future rounds.
Pro rata investors may want priority over others in exercising their pro rata rights, and you may want to cap the number of shares an investor can purchase through their pro rata rights or restrict when they can exercise them.
Different provisions offer pros and cons for each stakeholder. The following best practices will help you negotiate terms that are reasonable and flexible so pro rata rights don’t come back to bite you later. (Also, it's a good idea to partner with a lawyer to CYA.)
1. Clearly Define the Rules
With clear limits and restrictions on pro rata rights, you limit potential problems when you raise capital in future rounds. In addition to setting your own minimum investment threshold for granting pro rata rights, consider including these founder-friendly pro rata provisions:
Time-bound rights. Limit pro rata rights to one or two subsequent rounds, not forever.
Tie rights to participation. Make the right contingent on the investor maintaining a minimum ownership percentage or continuing board engagement.
Cap total ownership. Limit the total allocation available to all early investors under pro rata (e.g., 10% of the next round). You’ll avoid super pro rata.
Avoid automatic rights. Require explicit notice to exercise—otherwise, the right can sit dormant and complicate timing.
Use-it-or-lose-it clause. Set a short exercise window (e.g., 10–15 days post-round notice). If they miss it, they waive their pro rata for that round.
2. Pay Attention to Side Letters
Sometimes pro rata rights reside in side letters instead of the main term sheet. A side note or side letter is a supplemental contract that gives an investor terms or privileges not included in the standard financing documents.
Review all investor agreements carefully with a lawyer.
A single side letter granting broad rights can block equity allocations for others later and create serious fundraising headaches.
3. Negotiate Flexibility Clauses
Flexibility clauses are strategic carve-outs that help you avoid getting stuck in a legal tug-of-war later. For example, the lead investor in your next round has firm equity requirements and you need to make room in the cap table.
Reserve the right to reallocate unused pro rata to strategic investors.
Add a clause that allows you to limit pro rata participation if required by the next round’s lead investor.
4. Plan for Liquidity-Constrained Investors
Your early investors may not be planning to follow on, or they simply cannot due to liquidity constraints. It’s useful to find out and understand their plans and take action prior to raising your next round to simplify negotiations and expedite deals.
Maintain a clear, consistent communications. You want engaged investors, not anonymous backers.
Insist on transparency. Do they plan to use pro rata funds or SPVs to exercise rights? If so, find out who’s backing that and confirm alignment on governance and information rights.
If they can’t follow on, consider negotiating an early waiver of future pro rata to simplify your next round.
Ultimately, pro rata isn't just jargon you can brush off as a founder—it affects how future funding rounds work, how your cap table evolves, and how investors perceive you. Make sure you control who can play in future rounds, how pro rata can be exercised (or not), and plan to negotiate deal terms accordingly. That way you avoid surprises and maintain strategic control as your startup grows and scales.
