5 ms·

What does this mean? I have zero business acumen and have no familiarity with investing or how new companies work.

SandersAK 11y ago
if you are a YC company, they own a percent of your company (usually around 7%). If you raise additional funding later, this will dilute every shareholder's percentage down to accommodate the new investor. Traditionally YC did not have Pro Rata, which is the right to basically participate in the new round, to retain their original ownership percentage. Scenario: YC owns 7% New investor comes in and buys 20% YC dilutes 1.4% (which is 20% of their shares) With Pro Rata, YC could participate in the new round up to 1.4% of the total price of the company to maintain their 7%. Why this can be important: VCs are like beautiful but often panicky gazelles. They are easily spooked, and find comfort in the direction the herd is going. If an investor in a company in the previous round doesn't reinvest, this may look bad and cause them to back out. If YC invests in everyone's Pro Rata, it means that there'll be no apparent signal for the gazelles to act on. They'll hafta rely on their own judgement (crazy, I know.)
- coherentpony 11y ago
  Thanks for the explanation. Between you and tptacek I think I understand what's going on.
mynegation 11y ago
Pro-rata means that early investor reserves its right to participate in future financing rounds, up to such amount as to maintain their ownership share. YC did not do it before, but will start doing it now. They do not want to be leading investor, however, b/c if they do follow-up investments in one company but not the other, that would signal other investors their preferences, and will make financing prospects of companies they did not subsequently invest in, difficult.
loumf 11y ago
Early round investors would be diluted by subsequent rounds, so they protect against that by putting the pro-rata provision in the contract that lets them invest in later rounds (so that they can reverse the dilution). In the past YC decided not to exercise this right because if they did so selectively, it could be used to indicate what YC thinks about a company, which is mostly bad for those that didn't get re-investment. The change is that YC is now going to have an objective, public criteria for exercising this right, so it can't be used as a signal, but YC partners/investors can get the benefit of the rights they negotiated for.
tptacek 11y ago
Funding rounds dilute preexisting investors. One of the possible terms in an investment contract are pro-rata rights for investors, giving them the right during future financing rounds to invest more money to maintain their percentage ownership. Thus an early seed investor who gets 5% of the company for 500k can ensure they retain 5% of the company in the A and B rounds, so long as they're willing to fork over the cash for the top-up shares at the A and B round valuations. This is an important part of VC strategy. VCs invest in, say, 10 companies, expecting 8 to fail outright. The 2 winners need to make up for the 8 losers. But the investor can't see into the future to figure out which are the 2 winners. Pro-rata rights give them some optionality: by the time the A round happens, it'll be clearer to the investor whether they should have plowed more money into that company, and pro-rata lets them do that. The problem for YC is that each YC batch has 30-50 companies in it, most of which will fail. When those companies go to raise later rounds, new investors want to know whether YC believes in them. If YC exercises pro-rata rights on just some of their companies, the ones that don't see the exercise are damaged goods. So instead, YC is committing themselves to pro-rata all their companies (this is a lot of companies) so long as they can afford it.
- coherentpony 11y ago
  Thanks for the explanation.
- toomuchtodo 11y ago
  > The problem for YC is that each YC batch has 30-50 companies in it, most of which will fail. When those companies go to raise later rounds, new investors want to know whether YC believes in them. If YC exercises pro-rata rights on just some of their companies, the ones that don't see the exercise are damaged goods. So instead, YC is committing themselves to pro-rata all their companies (this is a lot of companies) so long as they can afford it. Does this mean a bunch of money is being thrown away on signaling?
  - pc86 11y ago
    Yes
theOnliest 11y ago
Related: is there some reliable "startup jargon for dummies" page somewhere? I'm often confused with all the talk of rounds, vesting, dilution, and whatnot. I know there are books, but I'm not planning to get into the startup scene; buying a book doesn't seem worth it to be slightly less confused on a website I waste lots of time on.
- ohitsdom 11y ago
  I second this request. Google took me to investopedia to learn "pro rata", but that wasn't as helpful as reading these comments. The startup community has so many buzzwords. My understanding of the jargon has increased a lot in the past year I've spent time on the site, but I still don't know much.
  - jsprogrammer 11y ago
    Round: Some people are purchasing shares of your company. Given cute names to indicate how many "rounds" you've done: Seed, Series A, Series B, Series C, Series D, Series E, etc Vesting: When you actually get the shares (instead of just being promised you'll receive them) Dilution: When the pool of shares expands without the existing shareholders receiving a commensurate proportion of the new shares (used to transfer value from existing shareholders to new). Usually occurs after each Round completes.
- spydum 11y ago
  literally query that search phrase, and the top 5-10 sites answer your question https://www.google.com/?q=startup%20jargon%20for%20dummies https://www.google.com/?q=startup%20jargon%20for%20dummies
  - theOnliest 11y ago
    I've done that, but I was more wondering if there was some place (a blog series or something) that people here would actually recommend. The top hits are all just lists with single terms like "B-to-C" and the like. They're fine if I need to know a single term, but don't really explain much else. For example: this article (http://www.techrepublic.com/article/glossary-startup-and-venture-capital-terms-you-should-know/ http://www.techrepublic.com/article/glossary-startup-and-ven...), gives the definition for "preferred stock" (a random selection) as "stock that carries a fixed dividend that is to be paid out before dividends carried by common stock." As someone not in the startup business (and not knowing much about finance in general), this is not really helpful. I'm not sure what it means for a dividend to be fixed, nor is there a definition of "common stock" anywhere. I realize this isn't really the right thread to ask, but these things come up all the time so it seems like there might be a respectable reference somewhere online.
vasilipupkin 11y ago
I am sorry, that really cracked me up. I hope you have business acumen > 0, for your sake :)
- coherentpony 11y ago
  I'd rather post a question here and learn something with the goal of attaining nonzero (but positive) business acumen than to say nothing and set myself up for a possible failure in the future. It might also be the case that someone else learnt something too.
  - vasilipupkin 11y ago
    of course, I agree, I wasn't critical of your post. I just found it amusing that you think you have zero business acumen. Apparently, those who downvoted me have no sense of humor :)

if you are a YC company, they own a percent of your company (usually around 7%). If you raise additional funding later, this will dilute every shareholder's percentage down to accommodate the new investor. Traditionally YC did not have Pro Rata, which is the right to basically participate in the new round, to retain their original ownership percentage. Scenario: YC owns 7% New investor comes in and buys 20% YC dilutes 1.4% (which is 20% of their shares) With Pro Rata, YC could participate in the new round up to 1.4% of the total price of the company to maintain their 7%. Why this can be important: VCs are like beautiful but often panicky gazelles. They are easily spooked, and find comfort in the direction the herd is going. If an investor in a company in the previous round doesn't reinvest, this may look bad and cause them to back out. If YC invests in everyone's Pro Rata, it means that there'll be no apparent signal for the gazelles to act on. They'll hafta rely on their own judgement (crazy, I know.)

coherentpony 11y ago
Thanks for the explanation. Between you and tptacek I think I understand what's going on.

mynegation 11y ago

Pro-rata means that early investor reserves its right to participate in future financing rounds, up to such amount as to maintain their ownership share. YC did not do it before, but will start doing it now. They do not want to be leading investor, however, b/c if they do follow-up investments in one company but not the other, that would signal other investors their preferences, and will make financing prospects of companies they did not subsequently invest in, difficult.

loumf 11y ago

Early round investors would be diluted by subsequent rounds, so they protect against that by putting the pro-rata provision in the contract that lets them invest in later rounds (so that they can reverse the dilution). In the past YC decided not to exercise this right because if they did so selectively, it could be used to indicate what YC thinks about a company, which is mostly bad for those that didn't get re-investment. The change is that YC is now going to have an objective, public criteria for exercising this right, so it can't be used as a signal, but YC partners/investors can get the benefit of the rights they negotiated for.

tptacek 11y ago

Funding rounds dilute preexisting investors. One of the possible terms in an investment contract are pro-rata rights for investors, giving them the right during future financing rounds to invest more money to maintain their percentage ownership. Thus an early seed investor who gets 5% of the company for 500k can ensure they retain 5% of the company in the A and B rounds, so long as they're willing to fork over the cash for the top-up shares at the A and B round valuations. This is an important part of VC strategy. VCs invest in, say, 10 companies, expecting 8 to fail outright. The 2 winners need to make up for the 8 losers. But the investor can't see into the future to figure out which are the 2 winners. Pro-rata rights give them some optionality: by the time the A round happens, it'll be clearer to the investor whether they should have plowed more money into that company, and pro-rata lets them do that. The problem for YC is that each YC batch has 30-50 companies in it, most of which will fail. When those companies go to raise later rounds, new investors want to know whether YC believes in them. If YC exercises pro-rata rights on just some of their companies, the ones that don't see the exercise are damaged goods. So instead, YC is committing themselves to pro-rata all their companies (this is a lot of companies) so long as they can afford it.

coherentpony 11y ago
Thanks for the explanation.
toomuchtodo 11y ago
> The problem for YC is that each YC batch has 30-50 companies in it, most of which will fail. When those companies go to raise later rounds, new investors want to know whether YC believes in them. If YC exercises pro-rata rights on just some of their companies, the ones that don't see the exercise are damaged goods. So instead, YC is committing themselves to pro-rata all their companies (this is a lot of companies) so long as they can afford it. Does this mean a bunch of money is being thrown away on signaling?
- pc86 11y ago
  Yes

theOnliest 11y ago

Related: is there some reliable "startup jargon for dummies" page somewhere? I'm often confused with all the talk of rounds, vesting, dilution, and whatnot. I know there are books, but I'm not planning to get into the startup scene; buying a book doesn't seem worth it to be slightly less confused on a website I waste lots of time on.

ohitsdom 11y ago
I second this request. Google took me to investopedia to learn "pro rata", but that wasn't as helpful as reading these comments. The startup community has so many buzzwords. My understanding of the jargon has increased a lot in the past year I've spent time on the site, but I still don't know much.
- jsprogrammer 11y ago
  Round: Some people are purchasing shares of your company. Given cute names to indicate how many "rounds" you've done: Seed, Series A, Series B, Series C, Series D, Series E, etc Vesting: When you actually get the shares (instead of just being promised you'll receive them) Dilution: When the pool of shares expands without the existing shareholders receiving a commensurate proportion of the new shares (used to transfer value from existing shareholders to new). Usually occurs after each Round completes.
spydum 11y ago
literally query that search phrase, and the top 5-10 sites answer your question https://www.google.com/?q=startup%20jargon%20for%20dummies https://www.google.com/?q=startup%20jargon%20for%20dummies
- theOnliest 11y ago
  I've done that, but I was more wondering if there was some place (a blog series or something) that people here would actually recommend. The top hits are all just lists with single terms like "B-to-C" and the like. They're fine if I need to know a single term, but don't really explain much else. For example: this article (http://www.techrepublic.com/article/glossary-startup-and-venture-capital-terms-you-should-know/ http://www.techrepublic.com/article/glossary-startup-and-ven...), gives the definition for "preferred stock" (a random selection) as "stock that carries a fixed dividend that is to be paid out before dividends carried by common stock." As someone not in the startup business (and not knowing much about finance in general), this is not really helpful. I'm not sure what it means for a dividend to be fixed, nor is there a definition of "common stock" anywhere. I realize this isn't really the right thread to ask, but these things come up all the time so it seems like there might be a respectable reference somewhere online.

vasilipupkin 11y ago

I am sorry, that really cracked me up. I hope you have business acumen > 0, for your sake :)

coherentpony 11y ago
I'd rather post a question here and learn something with the goal of attaining nonzero (but positive) business acumen than to say nothing and set myself up for a possible failure in the future. It might also be the case that someone else learnt something too.
- vasilipupkin 11y ago
  of course, I agree, I wasn't critical of your post. I just found it amusing that you think you have zero business acumen. Apparently, those who downvoted me have no sense of humor :)