Rights & follow-on
Pro-rata rights
Also called Pre-emption rights, Participation rights
The right, but not the obligation, to invest enough in future rounds to maintain your existing percentage of the company.
In plain English
A pro-rata right lets you keep up. If you own 2% and the company issues new shares, the right entitles you to buy 2% of the new issue at the round price, leaving your percentage unchanged. Without it you are diluted every round, whether you have the money to participate or not.
The right is optional in the sense that you may decline, and mandatory in the sense that the company must offer. That asymmetry is what makes it valuable: it is a free option on the company's future, exercisable only when you have information you did not have when you invested.
The economic logic is what professional investors call adverse selection working in your favour. When a company is doing badly, you decline and lose nothing. When it is doing well and the round is oversubscribed, you have a contractual right to a slice that everyone else is fighting for. Concentrating capital into your winners at a moment when you can see they are winning is close to the only structural edge available to a small investor.
In many jurisdictions a statutory version exists automatically — UK companies law grants pre-emption rights on new share issues to existing shareholders, though these are routinely disapplied in the articles or the shareholders' agreement. Statutory rights are not a substitute for a contractual one.
What it means for your cheque
This is the single most valuable thing a small cheque can negotiate, and the standard post-money SAFE does not include it. Ask for it in a side letter. Founders rarely refuse, because at the moment of asking it costs them nothing and reads as commitment rather than as a demand.
It is worth nothing without reserved capital. An angel who negotiates pro-rata rights and invests every available pound in first cheques will watch those rights expire unexercised in exactly the companies where they were valuable. Reserve one to two times your initial cheque per position at the moment you invest, not later.
Do the arithmetic
Following on versus not, in a company that works
You invest $25,000 at seed for 2%. The company raises Series A, B and C. You either exercise pro-rata each time or do not. Exit at $600m.
| Without follow-on — position at exit | about 0.85% after four rounds of dilution |
|---|---|
| Without follow-on — total invested | $25,000 |
| Without follow-on — proceeds | about $5.1m |
| With follow-on — Series A pro-rata | $40,000 |
| With follow-on — Series B pro-rata | $110,000 |
| With follow-on — Series C pro-rata | $260,000 |
| With follow-on — total invested | $435,000 |
| With follow-on — position and proceeds | 2.0% and about $12m |
Following on cost $410,000 more and returned nearly $7m more — but only because the company worked. The right lets you make that decision with six years of information you did not have at the start.
At the table
What to negotiate
- Ask for it explicitly in a side letter if the main instrument does not grant it. The post-money SAFE does not.
- Check for a minimum investment threshold — many side letters grant pro-rata only to holders above a stated size.
- Establish whether the right survives future rounds. Some are drafted to lapse at a Series A or on a major financing.
- Ask whether the right covers the full round or only the portion offered to existing holders.
- Confirm the notice period. Ten days to fund a six-figure call is not a right you can use; thirty is workable.
Around the world
How this differs by market
Major-investor thresholds are conventional in NVCA documents; small angels are frequently excluded unless a side letter says otherwise.
EUUK companies have statutory pre-emption rights on new issues, but they are almost always disapplied in the articles. A contractual right is what protects you.
APACAustralian and Singaporean practice follows US conventions. Indian rounds interact with foreign-investment pricing rules that can complicate follow-on participation.
Pro-rata rights: common questions
Do I automatically get pro-rata rights as an angel?
What is a super pro-rata right?
Is the right worth having if I cannot afford to follow on?
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