Pro rata rights can help startups attract and retain high-quality investors, make the investment opportunity more enticing-subsequently helping them raise capital more quickly. What are the benefits of pro rata rights for startups? Pro rata rights give investors the ability to maintain their ownership stake in a company after it raises new funding, to prevent them from being diluted. What are the benefits of pro rata rights for investors? Number of new shares available to purchase = Investor's ownership stake (percentage) x Total number of new shares being soldįor example, if an investor has a 5% ownership stake in a company and the company is selling 1M new shares, the investor would be entitled to purchase 50K of the new shares. To calculate how many new shares an investor is entitled to purchase by invoking their pro rata rights, use the following formula: How to calculate allocations resulting from pro rata rights? If the investor chooses not to invoke their rights, their ownership percentage drops to 9%. If the investor chooses to invoke their rights, they may purchase an additional 100K shares for $500K, bringing their total shares to 1.1M shares-resulting in the same ownership percentage (10%). The pro rata rights are triggered, so the investor is given the opportunity to purchase additional shares to maintain their ownership percentage. They will be creating and selling an additional 1M shares for $5 each (higher than the previous round of $2.5 per share). Let’s say an investor owns 10% of a startup (1M shares), and the startup decides to raise capital by kicking off a new round of equity funding. In most cases, investors with a liquidation preference will receive compensation before any other shareholders are paid.
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