Pro Rata Rights
An investor's right to invest in future rounds to maintain their ownership percentage.
Definition
Pro rata rights (also called preemptive rights in some contexts) give an existing investor the right, but not the obligation, to invest enough in the next round to maintain their current ownership percentage. For example, if an investor owns 10%, they can invest enough in the Series B to still own 10% afterward. This right is typically granted to major investors.
Why it matters
Pro rata rights do not directly affect employees, but they shape the dynamics of future rounds. If all existing investors exercise pro rata, there is less room for new investors, which can affect round dynamics and valuation negotiation.
Example
An investor owns 15% after Series A. The company raises a $20M Series B. The investor has the right to invest $3M (15% of $20M) to maintain their 15% ownership, preventing dilution.