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Pro rata rights (also known as preemptive rights, participation rights, or rights to maintain proportionate ownership), refer to the right of an investor to invest in a company’s next financing round up to an amount that is usually based on the investor’s then-current ownership of the company. As a practical matter, companies do not give pro rata rights to all of their investors because doing so may limit a company’s ability to raise new money or expand its investor base if the company’s existing investors do not wish to give up their rights and make room for new investors. Frequently, a lead investor in a company’s new investment round will propose to invest the vast majority of the money in the round, leaving little of the round to accommodate the pro rata rights of existing investors. In such situations, a company is required to ask its existing investors to waive or cut back their rights to invest in the round in order to complete the financing transaction. Even if a company’s existing investors are receptive to waiving their rights in favor of new investors, a company’s legal and administrative costs to manage and comply with pro rata rights rises along with the number of investors with such rights. In light of these considerations, many companies choose instead to give pro rata rights only to “major investors” or “major purchasers,” who typically must invest at least a certain threshold amount of money in the round to qualify as such.

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