Exercising pro rata rights maintains ownership, but the new money earns a lower multiple than the original investment. Modelling follow-ons across scenarios shows when they add value.
11 min read · Level 5
I think the clearest way to judge a follow-on is to pretend you had never invested and ask whether you would make this investment today, at this price, with this information. If the answer is no, the existing stake is a reason for sentiment, not for capital.
Continuing the previous example: the investor owns 7.6% before a Series B that raises 15,000,000 at a 100,000,000 post-money (15% sold).
Without following on: ownership falls to 7.6% x 0.85 = 6.46%.
Taking full pro rata: buy 7.6% of the new round.
Pro rata amount = 7.6% x 15,000,000 = 1,140,000 Shares bought = 1,140,000 / 100,000,000 = 1.14% of the company Ownership after = 6.46% + 1.14% = 7.60%
What the follow-on money earns after a later Series C selling 12%, at a 500,000,000 exit:
Follow-on stake at exit = 1.14% x 0.88 = 1.0032% Follow-on proceeds = 500,000,000 x 1.0032% = 5,016,000 Follow-on multiple = 5,016,000 / 1,140,000 = 4.4x
The original seed investment earned about 28.4x on the same exit. The follow-on earned 4.4x, because it bought in at ten times the seed price (100,000,000 versus 10,000,000 post-money).
Because follow-ons are often treated as automatic support for winners. Each follow-on is a new investment at a new price and should be judged on its own expected return.
It also shows why reserves matter: follow-ons in the best companies can still be excellent investments, but they carry less upside than early entry.
This is educational information, not investment, securities or financial advice. Rules differ by country and change — get advice from a qualified professional in your jurisdiction before acting.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Sources: U.S. SEC - Investor.gov; UK FCA - information for consumers
Follow-on across scenarios.
Scenario after Series B Probability Exit Follow-on proceeds Multiple Fails 40% 0 0 0x Modest sale 40% 150,000,000 1,504,800 1.32x Large exit 20% 500,000,000 5,016,000 4.4x
150,000,000 x 1.0032% = 1,504,800.
Expected multiple = 0.4 x 0 + 0.4 x 1.32 + 0.2 x 4.4 = 0 + 0.528 + 0.88 = 1.408x
The follow-on has positive expected value but far less than the original investment, with a 40% chance of losing all 1,140,000. Whether to take it depends on the alternatives for the same money and the investor's concentration in this company.
Assuming a follow-on in a performing company earns the same return as the original investment, or following on automatically without modelling the new entry price.
Multiply current ownership by the round size.
Divide the amount by the round's post-money valuation.
Apply later dilution and several exit values.
Weigh the expected multiple against other uses of the money and concentration.
When deciding whether to exercise pro rata rights in a later round.
Do not model follow-ons without considering how much of your total capital would then sit in one company.
Venture investors have published analyses and debates on whether follow-on reserves improve fund returns, with some arguing concentrated follow-ons in winners are essential and others noting that follow-on capital enters at higher prices and earns lower multiples than initial investments.
Follow-on value depends on price and selection. It is not automatically positive.
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