Pro Rata Rights
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What are Pro Rata Rights?
Pro rata rights, also known as participation rights or preemptive rights, allow existing investors to maintain their ownership percentage in a company by participating in future funding rounds. These rights give investors the option to purchase additional shares before the company offers them to new investors.
Advantages:
Pro rata rights protect investors from dilution, ensuring their investment's value and influence in the company remain intact. This is particularly beneficial during high-growth phases when additional funding rounds are common.
Disadvantages:
For the company, granting pro rata rights can complicate future financing rounds and limit the flexibility to attract new investors. It may also result in complex cap tables and additional administrative burdens.
Importance for Investors:
Pro rata rights are crucial for investors seeking to preserve their initial investment’s value and influence. They ensure that early backers are not disadvantaged as the company scales and new funding is secured, aligning long-term investor interests with the company's growth trajectory.
Example:
In 2012, early investors in Airbnb exercised their pro rata rights during subsequent funding rounds, allowing them to maintain their ownership percentage as the company grew and attracted significant new investments.
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Anti-Dilution Provision
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Bootstrapping
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Bridge Loan
A bridge loan is a short-term loan used to meet immediate financing needs while waiting for more permanent funding. It serves as a temporary solution to bridge the gap between the need for funds and the availability of long-term financing.
Cap Table
A Cap Table, or Capitalization Table, is a detailed spreadsheet or document that outlines the equity ownership, types of shares, and ownership percentages of a company. It includes information on founders, investors, and employees, as well as the dilution of shares over time through various funding rounds and option grants.
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