Pro rata is a bad term for founders

Do you mean in a down round or just a round at a low price?

In my experience, any down round requires massive changes to ownership across the cap table, previous rights or not. The only way to stop this is with even more onerous terms that one doesn't normally see in VC term sheets.

> Crazy! This is valuable term! Investors should have to pay more to get it

On the flip side, I'd love for a founder to give me a discount for agreeing to take out these boilerplate terms I have--as an angel investor--zero interest in adversarially leveraging.

One thing not mentioned here is that for very tiny investors, pro rata is a right that can protect against aggression from later, more highly resourced funders.

If the company is scaling quickly, and looks like it could have a good return, a later stage investor could come in and cause massive dilution in the cap table by issuing many shares and granting some amount to the employees and founders. If I had pro rata, I could have a proportional share of the funding, and even if in the likely case I didn’t have the capital I could likely raise it, and at least get some share of the upside.

It is interesting to me that the argument is over terms while admitting that "Contracts aren’t worth spit.".

Power and goodwill are what count.

However, contracts matter once outsiders start getting involved. The contract (hopefully) isn't there to bind the original parties much, but it matters a LOT once someone much more adversarial enters the picture.

This is a very candid and transparent article and it is very good of Aaron to spell this out so clearly. It is possible for pro-rata terms to work out well for founders but more often than not it only works to the advantage of investors (because they have more capital by definition) and it stacks the deck against the founders in later rounds (and may make it harder to close a later round!).