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These are known as 'pro-rata' rights, which entitle earlier stage investors to participate in later rounds in order to maintain their stake in the company. Thes
by huac 10y ago
These are known as 'pro-rata' rights, which entitle earlier stage investors to participate in later rounds in order to maintain their stake in the company. These are relatively well-established rights that you will likely find in most VC term sheets.
Pro-rata rights are, to some extent, a reward for the risk that the investors take in investing in a very early stage startup. They also ensure that early-stage investors remain invested in your company; without a pro-rata right, the absolute gain of your company exiting at $100M vs $500M is much lower for the investor with a small stake. In a similar vein, the protections protect the investor from being diluted out of any significant stake in your company.
- jacquesm 10y agoSure, I'm familiar with that. But there is no such thing as a demand that a later round actually takes place. That's up to the shareholders and if they don't want to raise another round because they don't like the terms then they don't. It's not an obligation.
- huac 10y agoOk, yeah, demanding subsequent rounds against founders' wishes is pretty mean. I guess you usually need investor approval to raise further rounds, but this would be taking that right of refusal much farther.