Demystifying pro-rata rights

Hi! I’m glad you’re here. You’ve made it to issue #70 of VC Demystified🪄.

My name’s Nicole - I’m a Principal at an early stage venture fund, and I know firsthand that VC can often be a black box. Breaking into the industry may feel daunting and resources can seem scarce and inaccessible. I wanted to put together a newsletter to give others the playbook I wish I had when I first started.

Today’s deep dive: Pro rata rights explained - the small term in a term sheet that makes a huge difference in fund returns.

^{My personal mission is to open as many doors as possible for other people and this newsletter is just one avenue to do that. As always, I will continue to post VC insights daily for free across my socials.}

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Read time: 3 minutes

Pro rata rights explained - the small term in a term sheet that makes a huge difference in fund returns

Pro rata rights are talked about constantly but never explained. They’re one of the most important terms in a term sheet and often the most valuable lever for investors over time.

Before we get started, be sure to check out my VC fund math newsletter issue to understand how VC exits / returns work.

Also check out this VC exit model excel template that you can download yourself.

What are Pro Rata Rights?

• Definition: Pro rata rights (a.k.a. “proportionate rights”) give investors the option, not the obligation, to invest in future financing rounds to maintain their ownership percentage.

• Example: If you own 5% of a startup at seed, and the company raises a Series A, pro rata rights allow you to invest again so you still own ~5% post-financing.

Why They Matter

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