#Stock pro rata series#
Especially for angel and seed investors, they guarantee a seat at the table during a Series A round. Your ‘pro-rata right’ in this situation is a $30k allocation in the next round.”įor all investors, these clauses are a risk management strategy, in that they add a layer of predictability to a generally unpredictable asset class. On the other hand, if you buy 1% of the round, a $30k investment, you will continue to own 1% of the company. If you don’t participate, you will be diluted 25% and will then own 0.75% of the company. The next round is a $3mm round at $9mm pre, $12mm post. “You invest $50k in a seed round at a $5mm cap and own 1% of the company. In a post about the subject, he gives the following example:
#Stock pro rata pro#
One of the more cogent explanations of how pro rata affects investor dynamics comes from Fred Wilson, a well-known venture capital blogger and managing partner of New York-based Union Square Ventures. In venture capital, a pro rata clause in an investment agreement gives the investor a right (but not the obligation) to participate in one or more future financing rounds to maintain their percentage stake in the company.
Literally translated, it means “according to the rate,” but for all intents and purposes it’s come to mean “proportionally” in both venture capital and other branches of finance and law. One thing to note about venture capitalists and lawyers: they tend to use lots of Latin phrases, pro rata included. But here, we’re focusing on two: pro rata rights and pre- and post-money valuation. There are many deal terms that affect which investors can get in, how much stock they’re able to buy during a funding round and at what price they buy those shares. In most cases, a startup’s fundraising history sets the trajectory for future investment. In overused Shakespeare quotes, college writing classes, American ambient electronic music albums and venture capital deals, “what’s past is prologue.” Let’s see what happens when a new round of financing comes in.
#Stock pro rata full#
Here’s the company’s full capitalization table from where we left off, after Internet of Wings raised its Series A:Īnd here’s the company’s share structure as of their Series A round:
(And this will tee us up for a discussion of “ratchet-based antidilution protections” in the next article in this series.) A quick reminder of where we left off What follows is our best attempt at making the topic of “ pro rata rights” approachable and, with some luck, fun.
The people, company and funds involved are fictitious, but the math and deal terms are very much real.Īfter covering the basics of founding a company, dividing up founder shares, capitalization tables, the common financial instruments, deal terms used in the seed funding process and how those deal terms affect pre- and post-money valuations, in this installment we’ll see what happens when Jill and Jack raise their Series B round.įor the sake of our story here, what happens during the Series B round will illustrate two of the other primary levers of power venture capitalists can negotiate into their investing agreements with their portfolio companies. To do so, we’re following two entrepreneurs who started a company and raised some money from investors. So we’ve launched a series called “ A Startup Takes Flight” to simply explain the dynamics of fundraising and deal terms. And even some of the resources designed to be approachable for the newcomer often raise more questions than they answer. To the uninitiated, startup fundraising can be confusing.
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