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1/ There's a lot of confusion out there about pro rata, which is probably one of the most misunderstood terms in the VC term-sheet. So here's a primer. medium.com/afore/everythi…
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Afore Capital
@AforeVC
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30. sij |
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2/ So what is pro rata? Basically, it's an option, not an obligation, granted to investors to maintain their ownership percentage in a company through future fund-raising rounds.
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Afore Capital
@AforeVC
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30. sij |
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3/ Think of it like ordering pizza for a party when you don't know how many people might ultimately be coming. Pro rata is a way for you to retain your share of cheese and pepperoni, even if more friends show up later.
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Afore Capital
@AforeVC
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30. sij |
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4/ With the advent of angels and pre-seed, though, more and more investors are being granted pro rata, setting up complicated cap tables and leading to potential future showdowns between founders and their earliest supporters.
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Afore Capital
@AforeVC
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30. sij |
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5/ "The best investors earn pro rata by adding value to the company in ways besides capital," says @garrytan of @InitializedCap. And by earning that privilege, investors actually help protect themselves.
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Afore Capital
@AforeVC
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30. sij |
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6/ Why? Because what's given can be taken away. "As newer investors come in with their own requirements and the cap table gets crowded, founders will oftentimes ask earlier investors to waive their pro rata rights for the good of the company," says @semil of @haystackvc.
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Afore Capital
@AforeVC
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30. sij |
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7/ There's drawbacks to yanking pro rata: it can cause founders to suffer reputational damage, and potentially cause issues with future fundraising.
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Afore Capital
@AforeVC
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30. sij |
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Afore Capital
@AforeVC
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30. sij |
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9/ Likewise, investors need to be aware that sometimes, their pro rata option needs to be waived. "There may be stages of the company where making all the puzzle pieces fit in a funding require some creativity," explains @hunterwalk of @homebrew.
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Afore Capital
@AforeVC
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30. sij |
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Afore Capital
@AforeVC
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30. sij |
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11/ The pro rata pizza party, in which everyone is vying for their slice, is changing.
What do you think? Let us know by commenting on our post here: medium.com/afore/everythi…
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