Fundraising
Pro rata rights explained
Understand pro rata participation rights, the ownership basis each one measures, and how an elected check changes a priced round, with worked numbers.
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A right to buy, not a share of the company
A pro rata right lets an existing investor put money into a later round, usually to hold its percentage rather than be diluted. It is a contractual right to participate up to some amount. It is not a holding, and it produces nothing until the holder elects to write a check and the company issues shares for it.
Three things decide what the right is worth in a particular round: the ownership basis the agreement names, the size of the round, and whether the holder elects to use it. Reading only the percentage in the side letter answers none of those questions on its own.
Identify the ownership basis the agreement uses
Different agreements measure participation against different denominators. They are not interchangeable, and the same investor can be entitled to noticeably different amounts under them.
| Basis | Entitlement is measured as |
|---|---|
| Fixed contractual percentage | The percentage written into the agreement, applied to the round. |
| Pre-round fully diluted ownership | The holder’s existing diluted shares divided by the pre-round fully diluted count, including unallocated reserves. |
| YC post-money side letter | The named post-money SAFE’s conversion shares divided by the company capitalization, which excludes the new money and the round’s new pool. |
| Original YC pro rata right | The holder’s then-current diluted ownership, applied to the financing after the one the SAFE converts in. |
The last two follow the YC SAFE conventions. An original YC right does not apply in its own SAFE’s conversion round; a post-money side letter applies in that conversion round and expires with it. Promised options and bespoke denominator exclusions are not part of any of these definitions.
Work through one round
Assume a company with 900,000 founder shares and 100,000 investor shares, no options and no reserve. It raises $2,000,000 at an $8,000,000 pre-money valuation, so the price is $8,000,000 ÷ 1,000,000 = $8.00 per share and the post-money valuation is $10,000,000. The investor holds a fixed 10% pro rata right, so the entitlement is 10% × $2,000,000 = $200,000.
| Investor elects | Left for other investors | Investor shares added | Investor ownership after |
|---|---|---|---|
| $200,000 | $1,800,000 | 25,000 | 10% |
| $100,000 | $1,900,000 | 12,500 | 9% |
| $0 | $2,000,000 | 0 | 8% |
Electing the full amount holds the investor at 10%. Electing nothing dilutes it from 10% to 8%, because the same 100,000 shares now sit in a larger company. Every check in the round buys shares at the same $8.00 price; the right decides who may write it, not what it costs.
Decide whether the check is inside or on top of the round
A term sheet can treat elected checks two ways, and the difference changes everyone’s numbers.
- Fixed total. The elected checks fit inside the investment already agreed. A $200,000 election leaves $1,800,000 for the other investors.
- Additional. The elected checks are added on top. A $200,000 election turns a $2,000,000 raise into $2,200,000, the post-money becomes $10,200,000, and the entitlement itself is measured against the resulting total: 10% of $2,200,000 is $220,000.
In Round modeling, choose the convention the term sheet uses. The price, conversions, anti-dilution and pool top-up are then solved once over the whole round, so an election never moves another holder’s figures by a percentage applied afterwards. Every check rounds independently to whole shares, and the difference between the cash and the whole shares it buys is reported rather than hidden.
Record the right so the round can use it
Record the right on the security the agreement attaches it to, with its agreement reference, eligibility window, and the financing IDs it applies to. See Record SAFEs and convertible notes for the fields, and give each financing a stable ID when a right applies only to a specific round.
A right outside its eligibility window on the model date, or one that does not name the financing, is ineligible and the model says so. An election above the entitlement is refused rather than trimmed. The app records and applies the terms you enter; it does not send a participation notice, collect the money, or decide whether a right survived a later amendment.