Pro Rata Right

A pro rata right is the right of a shareholder to purchase shares in a future financing equal to the percentage of equity the shareholder currently holds in the company at the time of the financing. So, for example, if an investor owns a 10% share in a company, then if the company were to offer to issue out additional stock in another round, the investor would be permitted to acquire enough stock in that round to maintain his or her 10% share in the company. Pro rata rights are typically set forth in the company corporate documents that explain the different classes of shares in the company and the relatives rights and preferences of each of the classes. Pro rata rights also may be referenced in term sheets provided to potential investors, as rights that will be offered to those investors if they invest in the company. Pro rata rights are not typically granted to minor investors in companies. Rather, they are granted to major investors in companies who show a willingness to continue on as investors with the company on a long-term basis. Such investors usually are professional investors, like angel investors or venture capitalists. Other right that are often demanded by such investors as part of their investment include preferences on liquidation, and the right to have a seat on the Board of Directors of the company.