Pro Rata Rights
The term ‘pro-rata rights’ refers to a contractual provision that enables investors to maintain their equity stake and their voting power even when new shares are issued, without the obligation to invest in later rounds. It is typically given to early stage investors who are willing to start up at one of their riskiest points in time. If the investor declines their pro-rata rights and fails to invest in follow-on rounds, they will be diluted. Being able to maintain a consistent ownership percentage in a company can mean the difference between making thousands and millions of dollars for an investor, hence the importance to maintain and activate their pro-rata rights.Before you sign a term sheet it is imperative that you understand the rights that your potential investors expect—do not agree to terms that you do not understand or have not discussed with your council.