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.

Example

Holding 0.1% and buying 0.02% of a round that issues 20% new equity, which keeps the stake at 0.1%.

Important

The right costs nothing to hold and a great deal to exercise - maintaining a stake through three rounds can require many times the original cheque, which is why reserves in practice go to a few holdings rather than all of them.

Related terms

• 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.
• Dilution — The reduction in your percentage ownership of a company when it issues new shares to someone else.
• 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.

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)
• A smaller slice of a much bigger company is usually the good outcome — Each funding round reduces existing holders' percentage. Dilution is not a loss in itself; it becomes one when the company's value does not rise enough to compensate, as in a down round. (12 min)
• Model the rounds between now and the exit, or your ownership estimate is fiction — Today's percentage is not what you will hold at an exit. Projecting future rounds and pool top-ups gives a realistic ownership figure and a much better sense of what an outcome would return. (12 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)
• Reserves and dry powder: the money you deliberately do not invest — Holding capital back looks like indecision and is frequently the most consequential decision in the portfolio. It is also not free, and the honest version of the argument prices both sides. (13 min)
• One investment in twenty pays for the other nineteen, or nothing does — There is no coupon and no dividend here. The return is realised only at an acquisition or a listing, most positions return little or nothing, and the entire portfolio's economics usually rest on one or two outcomes out of many. (12 min)

All 578 terms in the Investing glossary