If you're raising venture capital or investing in early-stage startups, chances are you've come across the term “pro rata” more than once. It might show up in term sheets, cap tables, or during heated conversations about future fundraising rounds. But what exactly does “pro rata” mean, and why should founders and angel investors care?

Let's break it down.

What Does "Pro Rata" Mean?

“Pro rata” is a Latin term that means “in proportion.” In the context of venture capital, it refers to an investor's right to maintain their percentage ownership in a company during future funding rounds.

Here's the idea: if an angel investor owns 5% of your startup after the seed round, a pro rata right gives them the option (not obligation) to invest enough in later rounds (like Series A or B) to keep that 5% stake.

Without this right, their ownership would get diluted as new investors come in and the company issues more shares.

Why Is Pro Rata Important?

For Investors:

  • Maintains their upside: If they backed you early and you're blowing up, they get to stay on the ride.

  • Reduces dilution: They avoid having their early investment value eroded.

  • Better return potential: Pro rata rights help them double down on winners, which is key to venture-style investing.

For Founders:

  • Signals confidence: Existing investors exercising their pro rata is a great signal to new investors that your company is worth betting on.

  • Protects relationships: Granting pro rata rights can be a way to reward early believers and keep them involved long-term.

How Pro Rata Rights Work in Practice

Let's say:

  • An angel invests $100K in your seed round at a $2M post-money valuation.

  • That gets them 5% ownership.

  • Two years later, you raise a Series A at a $10M valuation.

To maintain their 5%, the angel would have the option to invest $500K (5% of $10M) in the Series A. That way, they don't get diluted below 5%.

Should Founders Always Grant Pro Rata Rights?

It depends.

Most institutional investors will expect them. For angels, it's often a point of negotiation. Giving away pro rata can be a valuable incentive to early backers, but too many investors with pro rata rights can make your next round messy (and harder to fill).

Tip: You can also cap or time-limit pro rata rights. For example, only giving them for the next round or for up to a certain dollar amount.

A Quick Word of Caution for Angels

Just because you can invest pro rata, doesn't mean you always should. Participating in follow-ons ties up more capital and can increase risk if you don't have the full picture of a company's progress. Always do your diligence.