Pro-Rata Rights
Definition
The right to invest additional money in future funding rounds to maintain your ownership percentage. Pro-rata rights are standard for institutional investors. They allow existing shareholders to avoid dilution by buying their proportional share of new rounds. Employees almost never have pro-rata rights.
Real-World Example
An investor owns 15% of the company. A new Series C round would dilute them to 10%. With pro-rata rights, they can invest enough additional capital to maintain their 15% ownership. An employee with 0.5% ownership has no such option — they are diluted to 0.33% with no recourse.
Common Mistake
Not understanding the asymmetry between investor and employee protections. Investors get anti-dilution, pro-rata rights, and liquidation preferences. Employees get none of these. This fundamental asymmetry is why headline valuations significantly overstate employee equity value.
Why It Matters
Understanding pro-rata rights helps explain why investors maintain their percentage while yours decreases. It is another reason to apply realistic discounts when estimating what your equity is worth.
Related Terms
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