Understanding Pro Rata Basis in Term Sheets: Key Investor Rights Explained

Explore the pro rata basis in term sheets to learn how it protects investor ownership and influence during funding rounds.

11 views

Pro rata basis in a term sheet allows existing investors to maintain their ownership percentage during future funding rounds. This right gives them the option to buy additional shares proportional to their current stake. It’s vital for protecting shareholder value and maintaining influence in the company’s decision-making process.

FAQs & Answers

  1. What is the purpose of a pro rata clause? A pro rata clause in a term sheet allows investors to maintain their ownership percentage by purchasing additional shares during subsequent funding rounds.
  2. How does a pro rata right benefit investors? Pro rata rights protect investors from dilution, ensuring they can maintain their influence and ownership stake in a company.
  3. Is the pro rata right automatic for all investors? No, pro rata rights are typically specified in the term sheet and may not be granted to every investor.
  4. What might happen if an investor waives their pro rata rights? If an investor waives their pro rata rights, their ownership percentage may decrease in future funding rounds, leading to potential loss of influence.