Pro rata is a bad term for founders • Hacker News Board

Re: Pro rata is a bad term for founders

#41

Post by andreareina » Tue, Oct 12, 2021, 12:30 PM UTC

jollybean wrote: post #25

It's true that a pro-rata has material value. But the author doesn't indicate how that can be problematic. How do existing requirement to allow previous investors in the round, contribute to a 'warping' or 'problems'? I mean, if pro-rata is only designed to prevent dilution - well that should not be so bad. That means in any given new round, there should be enough room for new investors, no? It also should be less pa…

> in tight rounds where the founder wanted to bring in new investors or limit dilution

Pro rata means fewer new investors (for the same amount raised) or more dilution (for the same number of new investors)

Re: Pro rata is a bad term for founders

#42

Post by jamiequint » Tue, Oct 12, 2021, 4:23 PM UTC

lacker wrote: post #35

jamiequint wrote: post #16

I don't agree with this, pro-rata rights protect investors from dilutionary events which they have no control over. I guess that's one-sided in the way that any "right" is in a legal contract, but that's a weird way to frame it. It's also incorrect to frame the option as "free", you're only observing market behavior in a world in which the option exists, not one in which it doesn't exist. You can't say that investors…

Are you actually disagreeing with him, though? Pro rata is clearly a good thing for investors. But many founders just treat it as a neutral thing for them. I think and the author should both agree that a founder should slightly prefer the identical terms without a pro rata. If founders keep this in mind, they might be able to get a better deal while negotiating. Yeah, investors won't act exactly the same way, but tha…

I think you're correct, but that's not how I read the article.

Re: Pro rata is a bad term for founders

#43

Post by sytse » Tue, Oct 12, 2021, 5:32 PM UTC

akharris wrote: post #11

sytse wrote: post #10

One possible reason for pro-rata term that I don't see mentioned is preventing dilution due to an underpriced round. But since most of the time investors have to agree anyway to a new round that seems a minor concern.

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.

I mean a round on an artificially low price.

This is an contrived example: founders own the majority of the company and fundraise $1 from themselves at $1.01 post, wiping out existing investors.

Re: Pro rata is a bad term for founders

#44

Post by koopuluri » Wed, Oct 13, 2021, 4:28 AM UTC

rexreed wrote: post #40

For those who aren't familiar with Pro Rata, the term isn't being well defined here or in the original post. This site [0] does the best job explaining what Pro Rata rights are and why are they are important to both investors and their potential issues: "Pro-rata right is a legal term that describes the right, but not the obligation, that can be given to an investor to maintain their initial level of percentage owner…

Thank you, very helpful! You gave me the necessary context to understand the post.