Pro-rata Rights

A pro-rata right is a right that is given to investors and allows them to maintain their initial level of ownership percentage during later financing rounds.

With pro-rata rights, the investor is not obligated to keep their percentage of ownership in subsequent rounds, but they have the right to do so if they wish. Every time a startup raises a new round of funding, new shares are issued, and the equity stake of the current shareholders is diluted. This means that these shareholders will lose some of their voting power because new investors will come aboard.

The way to prevent that is for an early investor is to include a provision that grants them pro-rata rights.