Follow-on investment

Investing more money into a company you already hold, usually as part of a later financing round and at a higher valuation.

Example

Putting a further $12,000 into a holding at a $60 million post-money valuation, having first invested $5,000 at $5 million.

Important

It is a new investment at a new price and deserves the same analysis as a first cheque. 'I already own some' is not a thesis, and defending a percentage is not the same as buying value.

Related terms

  • Pro-rata rights — A contractual right to invest enough in a future round to keep your existing percentage of a company rather than being diluted by it.
  • Reserve ratio — The split of a strategy's total capital between first positions and money held back for later investment in holdings you already own.
  • Dilution — The reduction in your percentage ownership of a company when it issues new shares to someone else.

Lessons that explain it

  • A follow-on buys the same company at a higher price, so it needs its own maths — 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)
  • Would you invest in this round if you had never met the company? — A follow-on decision should be judged as a new investment at today's price and today's evidence. What you already invested is gone either way and should not decide what you do next. (9 min)
  • A pro-rata right is an option to keep your share, and options are worth more on the right companies — Pro-rata rights let you invest enough in later rounds to maintain your ownership. They are valuable mainly in companies that are doing well, where access is hard to get, and costly in companies that are not. (12 min)
  • If you invest everything in first cheques, you cannot back your winners — Planning reserves for follow-on investments before making initial investments protects your ability to support your best companies and to maintain ownership where it matters most. (11 min)
  • Adding to winners at higher prices often beats rescuing losers at lower ones — Follow-on capital usually has a better expected result in companies with strong evidence, even at higher prices, than in struggling companies at lower prices - though the right choice always depends on the specific evidence. (11 min)
  • Write the follow-on policy before the requests arrive — Deciding in advance what would earn more capital removes the pressure, relationships and urgency that distort follow-on decisions when a request is already on the table. (10 min)

All 578 terms in the Investing glossary