6 ms·

The importance of honoring pro-rata agreements

71 points by _sentient 12y ago

not_that_noob 12y ago
This behavior of the VCs towards angels is as old as the hills. They want control and will screw with anyone who stands in their way. In fact, I have long speculated that a requirement to make partner at some firms is how smooth you are when screwing over a founder or angel. The truth is that the smaller investors don't have leverage. And so they swallow hard and sign the paperwork. I applaud YC trying to stand up for the little guy, but I fear they will be unable to fight the seduction of founders of hotshot companies by big-name big-money VCs whispering sweet nothings into their ear.
austenallred 12y ago
I've seen this a couple times where the onus is mostly on the later-stage investors. They know the terms, and they know exactly what they need to say to lock out the earlier stage investors and take over a bigger portion of the round, so they start pushing levers to see what they can get to move, playing on the FUD of the founders that they might not be able to raise from somewhere else. What a terrible place to be put in as a company: A big opportunity you're incredibly excited about, but contingent on you screwing over the people who have helped get you to where you are in a small way. I would encourage any founders who are put in this type of scenario to fight back hard. Investors that are worth their while will respect your loyalty and your refusal to go back on your word. If I were a later-stage investor who proposed something like that and the company came back strong saying, "That's not even on the table, because we're not going to do something below the belt" I would gain additional respect for that company.
- founder6564 12y ago
  Keep in mind that unless the existing investors actually sign something agreeing to this, it cant happen. Many likely do sign, because they think that getting big-namebrand-investor onboard is worth the haircut. If they don't want to do it, they don't have to. If the company does it anyways, they would have a slam dunk legal case to reclaim their ownership. Majority shareholders diluting minority shareholders for their own benefit is probably the most common business dispute there is.
- 7Figures2Commas 12y ago
  Founders realistically have to pick and choose their battles. If a founder raises a seed round from 10 investors who each invest a five figure amount, and eight of those 10 investors do little to nothing after writing a check, it's difficult to expect the founder to go to bat for them if push comes to shove.
  - tptacek 12y ago
    Are you sure you're not moving the goalposts here, like, a lot? If you make a promise, keeping it doesn't constitute "going to bat for someone".
    - 7Figures2Commas 12y ago
      In an ideal world, everyone would honor their agreements. In the real world, the behavior Aaron is describing is happening whether we like it or not. Angel investors who are concerned about their pro rata rights can't pretend that they exist in an ideal world. They can do one of two things: passively accept whatever they get, or take action in an effort to get what they want. If you recognize the motivations of founders (and the pressures they may be put under), it is clear that the behavior of the angels themselves can either incentivize or disincentivize founders when it comes to honoring the obligations they made under different circumstances.
      - idlewords 12y ago
        It's possible to behave ethically in a fallen world. It's not even that hard. Your pose of hard-nosed realism is actually more repugnant than just straight up saying "I'm breaking my agreements because I want to".
        7Figures2Commas 12y ago
        > It's possible to behave ethically in a fallen world. You're absolutely right. It is. But as an investor, you are bound to get hurt if you assume that everybody you're conducting business with will do so. Again, you can either deal with the world as it exists, or lament the fact that it isn't perfect. In boxing, fighters are instructed to protect themselves at all times. That approach is a decent one outside of the boxing ring too.
- tptacek 12y ago
  I'm not sure this is such a terrible place for founders to be put in. It's pretty straightforward, as ethical dilemmas go. "Excitement" comes nowhere close to justifying breaking your word.
  - chimeracoder 12y ago
    > It's pretty straightforward, as ethical dilemmas go. "Excitement" comes nowhere close to justifying breaking your word. Agreed - this is inexcusable. If you lose an investment because a later-stage investor is keen on you cheating existing investors out of what you already promised them, I'd say you dodged a bullet - you don't want them owning any piece of your company. If your later-stage investors are so keen on working with investors who are willing to renege on their promises and legal obligations to earlier investors, that says something about: (A) The types of entrepreneurs they want to work with (B) How they themselves can expect to be treated in later rounds, when they are now the "earlier investors".
    - btown 12y ago
      And if your Series A investor denies pro-rata rights to your seed round investors, then it should expect to have its pro-rata rights denied in Series B. Which gives this Series A investor a perverse incentive to set up the company to look better in the short term to get it to Series B, rather than it acting in the IPO-timescale long-term interest of your company!
  - tomp 12y ago
    It's straightforward as an ethical dilemma, but maybe not as a practical/CEO dilemma. Are you willing to risk the future of your company, your employees and finally, your own future (by failing to raise another round) on keeping your word? Now, of course, if it's such a hot startup that investors are cramming to get into a round, it probably less of a dilemma. But that might not always be the case.
    - tptacek 12y ago
      Yes? I'm still not clear on why this is difficult. The reality is that the decision is probably never between the future of the company and honoring your promises. It would be irrational for an early investor to allow the company to die in order to preserve their percentage stake in a zeroed-out investment. The behavior contemplated in this blog post isn't that dilemma. It's "this conversation with early investors is going to be sticky, and will involve some form of concession to them --- therefore, we're going to exploit their lack of leverage and bulldoze through them." That's unethical. It's not a tragic dilemma. It's being presented with an opportunity to harm someone for your own convenience, and all that's asked of you as a human is to simply not do that.
- shalmanese 12y ago
  This has traditionally been the role of unions and why YC has morphed itself into a de-facto founders union to better negotiate terms like this across a collective of founders.
- otakucode 12y ago
  I wouldn't be surprised if this sort of thing were a test. If you're not willing to screw over the earlier investors, you are clearly not ready to manage a large company. Large companies run on 'if I don't do it a competitor will and then we'll lose', not on being good people. Especially considering that white collar crime is very rarely punished, and then only with a slap on the wrist, such crime is expected in such circles.
founder6564 12y ago
I am currently on the other side of the table. I have a startup that is doing well in traffic, but running out of money quickly. I want to sell the company, and I have several buyers, but my investors who have common stock are threatening to kill any deal I bring unless they get above and beyond their pro-rata shares. At least the investors in this article have the option of not signing whatever paperwork the new investors push on them. Much harder situation for me as I risk walking away with nothing unless I give more than our investors are entitled to.
- 3pt14159 12y ago
  Can you share the rough deal size and investor payback? Most investors have 1x liquidation preference, and I can totally see them getting at least that, even if they didn't write it into the contract; but if they are asking for more than 3 or 4x on a short term deal, then they're just being greedy.
  - founder6564 12y ago
    I would like to keep it confidential, since my investors likely read HN. Deal size was above 5 million but less than 10 million. They are pure common, no liquidation preference or anything like that. For all intents and purposes they hold the same shares and rights as myself. They invested more than they would receive in a sale under pro-rata terms, so they would have a loss, but still a partial return on investment. You say I should honor terms not written into a contract and give them a 1x preference? Seems silly to me. If they wanted those terms, they should have negotiated it. I do not feel entitled to give them more than what they negotiated for. These guys are a professional fund and this is the name of the game. Unfortunately, it looks like unless I cave they will just let the company die. They ultimately know that the sale means much more to me than it does to them. All the pressure is on me, to end up with 'fuck you' money. They likely do not care about the money as much as not having to write down a loss or something. If I was to give them what they want, I would walk away with close to nothing after having spent significant time working for almost no salary.
    - 12y ago
dsjoerg 12y ago
In some cases this could be angel investors simply not doing what's in their best financial interest, either short-term or not at all. If one gets the reputation of always giving up one's pro-rata rights, then you might as well not have them, right? It's interesting to consider in what circumstances consenting to surrendering their pro-rata might be rational behavior. The surrender is financially equivalent to doing the round at a lower valuation -- as angel investors have effectively sold their pro-rata rights back to the founders, who give them to the new investors. However, compared to simply doing the lower-valuation round, this approach saves more face for the angel investors.
- joshu 12y ago
  This is somewhere between wrong and irrelevant.
jpeg_hero 12y ago
laughing at the default variables in the spreadsheet. ludicrous the idea that you can get a 50x return by owning a 1% of a company that was seeded at a $10m valuation. ....and lets just assume a $1B exit for arguments sake! haha, this guy must be raising money for a seed fund or something. -- oh yeah, and the fact that prorata shares actually cost you something, you don't get them for free as Aaron seems to think.
- 7Figures2Commas 12y ago
  Yes, the numbers are absurd. I feel sorry for LPs in any seed fund run by somebody who is handing out $10 million valuations. As for the $1 billion exit, according to CB Insights, in 2013, 19 tech companies went public or were acquired at a billion-plus valuation. That represents slightly more than 1% of all exits. Over 70% of the exits were under $200 million. So any angel banking on billion dollar exits would probably be better off going to Vegas.
  - akharris 12y ago
    See Paul's comment above - not really sure why this is absurd. The vast majority of venture returns are in the extreme long tail outcomes.
    - 7Figures2Commas 12y ago
      The rule of thumb is that 20% of a venture fund's investments produce 80% of the returns. Outside of the top performing funds, those returns are generally not eye-popping. The economics of a seed stage fund differ from a traditional venture fund. Stakes are a lot smaller and the number of portfolio companies is a lot larger. Maintaining a stake can be difficult, even with pro rata rights, because the cost of participating in future financings can be too high. Valuation is absolutely crucial to successful startup investing at the seed stage. A seed stage fund that hands out $10 million valuations like candy is not likely to be very successful. Based on the percentages, a seed stage fund that has several hundred companies in its portfolio is still unlikely to see a billion dollar exit. According to CB Insights, 45% of exits in 2013 were at valuations under $50 million. Do the math. If you invest at bloated valuations at the seed stage, you're not statistically likely to produce great returns when all is said and done, even if you are better than most at selecting companies that have liquidation events (most don't obviously).
joshu 12y ago
Pro rata is most important in the case of a down round. Your ownership really dilutes in that situation. For what it's worth, I've definitely been asked nicely if I would consider not taking my prorata because space is needed. When things are THAT tight I am often asked to sell shares to the new investor as well.
- hglaser 12y ago
  What do you say in those situations?
  - joshu 12y ago
    I will do what the founders tell me to do. If I am making their lives more difficult then I am failing. Sometimes they ask me to please do take the prorata for optics' sake, too.
    - deleted 12y ago
      [deleted]
spinlock 12y ago
Why would a fund want to participate in a series A with an entrepreneur who screws their investors? Wouldn't the logical conclusion be to screw the series A investors when they go to raise a series B?
- danielweber 12y ago
  Because the series A investors have clout and standing with (and may be the same parties as) the series B investors.
avemuri 12y ago
Forgive me if this is a naive question, but why are pro-rata rights considered standard? It seems like it's essentially the right to dilute founders in the future to maintain your ownership. Yes you're investing early, but that's priced into the valuation. I suppose the right has value, so perhaps a lower valuation would be justified. But why do pro-rata rights always elicit this moral outrage when called into question?
- pbreit 12y ago
  If the pro-rata rights exist, it's seems obvious that trying to void them is at least unethical. But pro-rata rights make perfect sense to me. I don't see it as "the right to dilute founders" but more "thanks for taking a risk on us when it was far from clear that things might work out...I know your economics necessitate a follow on like this".
  - avemuri 12y ago
    Agreed on the first point, I didn't mean to say honoring the contract is up for debate. On the second, yeah I'd want my helpful early investors to continue to be meaningfully invested. But what about unhelpful ones? I guess I'm asking why is it standard to promise this right before you've worked with an angel. The angel took a risk, but that risk was priced into the valuation in theory. I'm in India. A ROFR was also once considered standard here. "We took the early risk, so we should get first dibs on the whole round." That went south because it was jeopardizing fundraising and angels didn't have deep enough pockets to do whole Series As anyway. I guess I'm applying the same logic there. If a pro-rata jeopardizes fundraising and causes all these headaches, why not just take it out and adjust the angel round valuation accordingly.
- patio11 12y ago
  You're conflating two very different sources of moral outrage. One is that, prior to investors and founders memorializing their agreement on pro-rata rights in a contract, some investors feel like they're entitled to them because they're a standard term. One reason why they're standard is detailed below. The present controversy is that after investors/founders committed to pro-rata rights, later investors convinced founders to not honor those pre-existing commitments. Yes you're investing early, but that's priced into the valuation. Many investors would say "If you're investing and not getting pro-rata rights, the valuation you've negotiated is not a meaningful number, because it can be retroactively renegotiated by parties who do not necessarily have to include you in that conversation. It is thus not conveniently possible to award investors with, nor desirable for investors to seek, an attractive valuation for taking on extra risk by investing early unless that attractive valuation comes with pro-rata rights."
nasmorn 12y ago
Let us give the super angels the benefit of the doubt. They probably know that their pro-rata rights are not always enforceable and price this into the valuation. Good for them if they can keep them but they are probably at all surprised if they don't. It is a numbers game for investors.
GFK_of_xmaspast 12y ago
Startups are disrupting everything these days.
dllthomas 12y ago
Would it be worthwhile to name-and-shame VCs that are pushing for this? Knowledge that some VC demands the startups they fund be willing to break their word should mean startups they fund aren't worth our trust, which should destroy a lot of their value.

71 points by _sentient 12y ago

This behavior of the VCs towards angels is as old as the hills. They want control and will screw with anyone who stands in their way. In fact, I have long speculated that a requirement to make partner at some firms is how smooth you are when screwing over a founder or angel. The truth is that the smaller investors don't have leverage. And so they swallow hard and sign the paperwork. I applaud YC trying to stand up for the little guy, but I fear they will be unable to fight the seduction of founders of hotshot companies by big-name big-money VCs whispering sweet nothings into their ear.

austenallred 12y ago

I've seen this a couple times where the onus is mostly on the later-stage investors. They know the terms, and they know exactly what they need to say to lock out the earlier stage investors and take over a bigger portion of the round, so they start pushing levers to see what they can get to move, playing on the FUD of the founders that they might not be able to raise from somewhere else. What a terrible place to be put in as a company: A big opportunity you're incredibly excited about, but contingent on you screwing over the people who have helped get you to where you are in a small way. I would encourage any founders who are put in this type of scenario to fight back hard. Investors that are worth their while will respect your loyalty and your refusal to go back on your word. If I were a later-stage investor who proposed something like that and the company came back strong saying, "That's not even on the table, because we're not going to do something below the belt" I would gain additional respect for that company.

founder6564 12y ago
Keep in mind that unless the existing investors actually sign something agreeing to this, it cant happen. Many likely do sign, because they think that getting big-namebrand-investor onboard is worth the haircut. If they don't want to do it, they don't have to. If the company does it anyways, they would have a slam dunk legal case to reclaim their ownership. Majority shareholders diluting minority shareholders for their own benefit is probably the most common business dispute there is.
7Figures2Commas 12y ago
Founders realistically have to pick and choose their battles. If a founder raises a seed round from 10 investors who each invest a five figure amount, and eight of those 10 investors do little to nothing after writing a check, it's difficult to expect the founder to go to bat for them if push comes to shove.
- tptacek 12y ago
  Are you sure you're not moving the goalposts here, like, a lot? If you make a promise, keeping it doesn't constitute "going to bat for someone".
  - 7Figures2Commas 12y ago
    In an ideal world, everyone would honor their agreements. In the real world, the behavior Aaron is describing is happening whether we like it or not. Angel investors who are concerned about their pro rata rights can't pretend that they exist in an ideal world. They can do one of two things: passively accept whatever they get, or take action in an effort to get what they want. If you recognize the motivations of founders (and the pressures they may be put under), it is clear that the behavior of the angels themselves can either incentivize or disincentivize founders when it comes to honoring the obligations they made under different circumstances.
    - idlewords 12y ago
      It's possible to behave ethically in a fallen world. It's not even that hard. Your pose of hard-nosed realism is actually more repugnant than just straight up saying "I'm breaking my agreements because I want to".
      - 7Figures2Commas 12y ago
        > It's possible to behave ethically in a fallen world. You're absolutely right. It is. But as an investor, you are bound to get hurt if you assume that everybody you're conducting business with will do so. Again, you can either deal with the world as it exists, or lament the fact that it isn't perfect. In boxing, fighters are instructed to protect themselves at all times. That approach is a decent one outside of the boxing ring too.
tptacek 12y ago
I'm not sure this is such a terrible place for founders to be put in. It's pretty straightforward, as ethical dilemmas go. "Excitement" comes nowhere close to justifying breaking your word.
- chimeracoder 12y ago
  > It's pretty straightforward, as ethical dilemmas go. "Excitement" comes nowhere close to justifying breaking your word. Agreed - this is inexcusable. If you lose an investment because a later-stage investor is keen on you cheating existing investors out of what you already promised them, I'd say you dodged a bullet - you don't want them owning any piece of your company. If your later-stage investors are so keen on working with investors who are willing to renege on their promises and legal obligations to earlier investors, that says something about: (A) The types of entrepreneurs they want to work with (B) How they themselves can expect to be treated in later rounds, when they are now the "earlier investors".
  - btown 12y ago
    And if your Series A investor denies pro-rata rights to your seed round investors, then it should expect to have its pro-rata rights denied in Series B. Which gives this Series A investor a perverse incentive to set up the company to look better in the short term to get it to Series B, rather than it acting in the IPO-timescale long-term interest of your company!
- tomp 12y ago
  It's straightforward as an ethical dilemma, but maybe not as a practical/CEO dilemma. Are you willing to risk the future of your company, your employees and finally, your own future (by failing to raise another round) on keeping your word? Now, of course, if it's such a hot startup that investors are cramming to get into a round, it probably less of a dilemma. But that might not always be the case.
  - tptacek 12y ago
    Yes? I'm still not clear on why this is difficult. The reality is that the decision is probably never between the future of the company and honoring your promises. It would be irrational for an early investor to allow the company to die in order to preserve their percentage stake in a zeroed-out investment. The behavior contemplated in this blog post isn't that dilemma. It's "this conversation with early investors is going to be sticky, and will involve some form of concession to them --- therefore, we're going to exploit their lack of leverage and bulldoze through them." That's unethical. It's not a tragic dilemma. It's being presented with an opportunity to harm someone for your own convenience, and all that's asked of you as a human is to simply not do that.
shalmanese 12y ago
This has traditionally been the role of unions and why YC has morphed itself into a de-facto founders union to better negotiate terms like this across a collective of founders.
otakucode 12y ago
I wouldn't be surprised if this sort of thing were a test. If you're not willing to screw over the earlier investors, you are clearly not ready to manage a large company. Large companies run on 'if I don't do it a competitor will and then we'll lose', not on being good people. Especially considering that white collar crime is very rarely punished, and then only with a slap on the wrist, such crime is expected in such circles.

founder6564 12y ago

I am currently on the other side of the table. I have a startup that is doing well in traffic, but running out of money quickly. I want to sell the company, and I have several buyers, but my investors who have common stock are threatening to kill any deal I bring unless they get above and beyond their pro-rata shares. At least the investors in this article have the option of not signing whatever paperwork the new investors push on them. Much harder situation for me as I risk walking away with nothing unless I give more than our investors are entitled to.

3pt14159 12y ago
Can you share the rough deal size and investor payback? Most investors have 1x liquidation preference, and I can totally see them getting at least that, even if they didn't write it into the contract; but if they are asking for more than 3 or 4x on a short term deal, then they're just being greedy.
- founder6564 12y ago
  I would like to keep it confidential, since my investors likely read HN. Deal size was above 5 million but less than 10 million. They are pure common, no liquidation preference or anything like that. For all intents and purposes they hold the same shares and rights as myself. They invested more than they would receive in a sale under pro-rata terms, so they would have a loss, but still a partial return on investment. You say I should honor terms not written into a contract and give them a 1x preference? Seems silly to me. If they wanted those terms, they should have negotiated it. I do not feel entitled to give them more than what they negotiated for. These guys are a professional fund and this is the name of the game. Unfortunately, it looks like unless I cave they will just let the company die. They ultimately know that the sale means much more to me than it does to them. All the pressure is on me, to end up with 'fuck you' money. They likely do not care about the money as much as not having to write down a loss or something. If I was to give them what they want, I would walk away with close to nothing after having spent significant time working for almost no salary.
  - 12y ago

dsjoerg 12y ago

In some cases this could be angel investors simply not doing what's in their best financial interest, either short-term or not at all. If one gets the reputation of always giving up one's pro-rata rights, then you might as well not have them, right? It's interesting to consider in what circumstances consenting to surrendering their pro-rata might be rational behavior. The surrender is financially equivalent to doing the round at a lower valuation -- as angel investors have effectively sold their pro-rata rights back to the founders, who give them to the new investors. However, compared to simply doing the lower-valuation round, this approach saves more face for the angel investors.

joshu 12y ago
This is somewhere between wrong and irrelevant.

jpeg_hero 12y ago

laughing at the default variables in the spreadsheet. ludicrous the idea that you can get a 50x return by owning a 1% of a company that was seeded at a $10m valuation. ....and lets just assume a $1B exit for arguments sake! haha, this guy must be raising money for a seed fund or something. -- oh yeah, and the fact that prorata shares actually cost you something, you don't get them for free as Aaron seems to think.

7Figures2Commas 12y ago
Yes, the numbers are absurd. I feel sorry for LPs in any seed fund run by somebody who is handing out $10 million valuations. As for the $1 billion exit, according to CB Insights, in 2013, 19 tech companies went public or were acquired at a billion-plus valuation. That represents slightly more than 1% of all exits. Over 70% of the exits were under $200 million. So any angel banking on billion dollar exits would probably be better off going to Vegas.
- akharris 12y ago
  See Paul's comment above - not really sure why this is absurd. The vast majority of venture returns are in the extreme long tail outcomes.
  - 7Figures2Commas 12y ago
    The rule of thumb is that 20% of a venture fund's investments produce 80% of the returns. Outside of the top performing funds, those returns are generally not eye-popping. The economics of a seed stage fund differ from a traditional venture fund. Stakes are a lot smaller and the number of portfolio companies is a lot larger. Maintaining a stake can be difficult, even with pro rata rights, because the cost of participating in future financings can be too high. Valuation is absolutely crucial to successful startup investing at the seed stage. A seed stage fund that hands out $10 million valuations like candy is not likely to be very successful. Based on the percentages, a seed stage fund that has several hundred companies in its portfolio is still unlikely to see a billion dollar exit. According to CB Insights, 45% of exits in 2013 were at valuations under $50 million. Do the math. If you invest at bloated valuations at the seed stage, you're not statistically likely to produce great returns when all is said and done, even if you are better than most at selecting companies that have liquidation events (most don't obviously).

joshu 12y ago

Pro rata is most important in the case of a down round. Your ownership really dilutes in that situation. For what it's worth, I've definitely been asked nicely if I would consider not taking my prorata because space is needed. When things are THAT tight I am often asked to sell shares to the new investor as well.

hglaser 12y ago
What do you say in those situations?
- joshu 12y ago
  I will do what the founders tell me to do. If I am making their lives more difficult then I am failing. Sometimes they ask me to please do take the prorata for optics' sake, too.
  - deleted 12y ago
    [deleted]

spinlock 12y ago

Why would a fund want to participate in a series A with an entrepreneur who screws their investors? Wouldn't the logical conclusion be to screw the series A investors when they go to raise a series B?

danielweber 12y ago
Because the series A investors have clout and standing with (and may be the same parties as) the series B investors.

avemuri 12y ago

Forgive me if this is a naive question, but why are pro-rata rights considered standard? It seems like it's essentially the right to dilute founders in the future to maintain your ownership. Yes you're investing early, but that's priced into the valuation. I suppose the right has value, so perhaps a lower valuation would be justified. But why do pro-rata rights always elicit this moral outrage when called into question?

pbreit 12y ago
If the pro-rata rights exist, it's seems obvious that trying to void them is at least unethical. But pro-rata rights make perfect sense to me. I don't see it as "the right to dilute founders" but more "thanks for taking a risk on us when it was far from clear that things might work out...I know your economics necessitate a follow on like this".
- avemuri 12y ago
  Agreed on the first point, I didn't mean to say honoring the contract is up for debate. On the second, yeah I'd want my helpful early investors to continue to be meaningfully invested. But what about unhelpful ones? I guess I'm asking why is it standard to promise this right before you've worked with an angel. The angel took a risk, but that risk was priced into the valuation in theory. I'm in India. A ROFR was also once considered standard here. "We took the early risk, so we should get first dibs on the whole round." That went south because it was jeopardizing fundraising and angels didn't have deep enough pockets to do whole Series As anyway. I guess I'm applying the same logic there. If a pro-rata jeopardizes fundraising and causes all these headaches, why not just take it out and adjust the angel round valuation accordingly.
patio11 12y ago
You're conflating two very different sources of moral outrage. One is that, prior to investors and founders memorializing their agreement on pro-rata rights in a contract, some investors feel like they're entitled to them because they're a standard term. One reason why they're standard is detailed below. The present controversy is that after investors/founders committed to pro-rata rights, later investors convinced founders to not honor those pre-existing commitments. Yes you're investing early, but that's priced into the valuation. Many investors would say "If you're investing and not getting pro-rata rights, the valuation you've negotiated is not a meaningful number, because it can be retroactively renegotiated by parties who do not necessarily have to include you in that conversation. It is thus not conveniently possible to award investors with, nor desirable for investors to seek, an attractive valuation for taking on extra risk by investing early unless that attractive valuation comes with pro-rata rights."

nasmorn 12y ago

Let us give the super angels the benefit of the doubt. They probably know that their pro-rata rights are not always enforceable and price this into the valuation. Good for them if they can keep them but they are probably at all surprised if they don't. It is a numbers game for investors.

GFK_of_xmaspast 12y ago

Startups are disrupting everything these days.

dllthomas 12y ago

Would it be worthwhile to name-and-shame VCs that are pushing for this? Knowledge that some VC demands the startups they fund be willing to break their word should mean startups they fund aren't worth our trust, which should destroy a lot of their value.