Every investor I talk to asks about pro-rata rights. I vaguely understand it means they can invest in future rounds, but why does it matter? Should I give it to everyone?
Pro-rata = right to invest enough in future rounds to maintain your ownership percentage.
Example: Investor owns 5% after seed. Series A is happening. Pro-rata right lets them invest in Series A to stay at 5% (instead of being diluted down to 3%).
Why investors care: Their returns come from winners. If they own 5% of a $1B company, that's $50M. If they got diluted to 2%, that's only $20M. Pro-rata lets them double down on winners.
Should you give pro-rata to everyone? No. Here's why:
1. Your Series A lead will want to own ~20%. If all your seed investors exercise pro-rata, there's less room for the lead.
2. Some seed investors write $25K checks. Do you really want 15 people with pro-rata rights cluttering your round?
Typical approach: Give pro-rata to your lead seed investor and major checks ($100K+). Smaller angels get standard SAFE without pro-rata, or pro-rata with a minimum exercise amount.
Watch out for MFN (Most Favored Nation) clauses in your SAFEs. If you give one investor pro-rata, and another investor has MFN, they can claim pro-rata too.
YC's post-money SAFE includes pro-rata by default. If you're doing custom SAFEs without pro-rata, make sure they don't have MFN that triggers off other SAFEs.
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