Series B + Pro Rata Rights
Pro rata rights give investors the option (but not the obligation) to maintain their ownership percentage in future funding rounds, helping them maintain their ownership percentage in future rounds, thereby avoiding dilution.
Investors benefit by:
- Managing risk in an unpredictable asset class.
- Retaining access to top-performing startups.
- Preserving board seats tied to ownership thresholds.
- Ensuring continued influence, especially for early-stage investors in later rounds.
Entrepreneurs benefit from clearer planning around future participation, but must vet pro rata investors carefully—unengaged or misaligned investors can crowd out more valuable ones.
Fred Wilson’s Example (Unrelated to Startup Takes Flight):
“You invest $50k in a seed round at a $5mm cap and own 1% of the company. The next round is a $3mm round at $9mm pre, $12mm post. If you don’t participate, you will be diluted 25% and will then own 0.75% of the company. On the other hand, if you buy 1% of the round, a $30k investment, you will continue to own 1% of the company. Your ‘pro-rata right’ in this situation is a $30k allocation in the next round.”
| Fred Wilson’s Simple Example | Fields | Fields | No Participation | Participation |
| Investment | 50,000 | |||
| Seed Round – Cap | 5,000,000 | % Ownership Calc | Pre-$ Portion / Post $ | Total Investment / Post $ |
| % | 1.0% | % Ownership | 0.75% | 1.00% |
| Pre-$ | 9,000,000 | Pre-$ Portion | 90,000 | 90,000 |
| Investment | 3,000,000 | Investment | 0 | 30,000 |
| Post-$ | 12,000,000 | Total | 90,000 | 120,000 |
- Without pro-rata rights, diluted .25%. With pro-rata rights, can invest $30K to maintain 1$ ownership.
Series B Round
- Investment Round: $15 million
- Pre-Money Valuation: $35 million (21.2% Series A Post $ increase)
- Post-Money Valuation: $50 million (no discounts or caps)
Series B New Price Per Share = $1.818.
- Pre-money valuation ($35 million) / # of shares outstanding prior to Series B (19.25 million)
Series B New Shares
- Will need to issue $15 million worth of stock at a share price of $1.818 per share.
- So $15 million / $1.818 = 8.25 million shares
| Capitalization Table after Series B | Values | Calculation |
| Pre-Money Valuation | $35,000,000 | |
| Series B $ Raised | $15,000,000 | |
| Post-$ | $50,000,000 | |
| % Change from Sr. A | 21% | 35M / 28.87M – 1 |
| Share Price At New Round | $1.82 | 35M / 19.25M Shares |
| New Shares from Series B | 8,250,000 | 15M / $1.82 |
Investor Pro-Rata Rights:
- BlackBox Capital has pro rata rights on its 3.46 percent Series A stake, but not its Seed stake
- Provident Capital has pro rata rights on its 6.93 percent Series A stake
- Cormorant Ventures has pro rata rights on its 13.85 percent Series A stake
Investment Required to Maintain Pro Rata Stake =
- (% Stake You Want to Maintain) x (# of New Shares Being Issued) x Share Price at New Round
| Shareholder | Class | Percent at Series A | New Series B Shares | Shares to Purchase | Series B Share Price | Minimum Investment |
| Cormorant Ventures | Series A Pref. | 13.9% | 8,250,000 | 1,142,857 | $1.82 | $2,077,922 |
| Provident Capital | Series A Pref. | 6.9% | 8,250,000 | 571,429 | $1.82 | $1,038,961 |
| Blackbox Capital | Series A Pref. | 3.5% | 8,250,000 | 285,714 | $1.82 | $519,481 |
In this case, because the company’s valuation hasn’t increased by a huge amount and the company is raising a sufficiently large amount of money in this round, all investors are able to participate and maintain their pro rata stakes.
- Cormorant Ventures had to put in a minimum of $2.077 million to maintain their 13.85 percentage stake from the previous round. By investing the additional $8 million, they grew their percent stake in the company to roughly 30 percent.
- To get their 5.49M shares, divide 9,999,000 / $1.8. Same logic applies to other investors.
| Shareholder | Class | # of Shares | Percent | Price | Value |
| Jill | Common | 4,800,000 | 17.5% | $1.8 | $ 8,727,273 |
| Jack | Common | 3,200,000 | 11.6% | $1.8 | $ 5,818,182 |
| Employee Pool | Common | 2,000,000 | 7.3% | $1.8 | $ 3,636,364 |
| Opaque Ventures | Seed Pref. | 2,083,333 | 7.6% | $1.8 | $ 3,787,879 |
| Blackbox Capital | Seed Pref. | 2,500,000 | 9.1% | $1.8 | $ 4,545,455 |
| Cormorant Ventures | Series A Pref. | 2,666,667 | 9.7% | $1.8 | $ 4,848,485 |
| Provident Capital | Series A Pref. | 1,333,333 | 4.8% | $1.8 | $ 2,424,242 |
| Blackbox Capital | Series A Pref. | 666,667 | 2.4% | $1.8 | $ 1,212,121 |
| TOTAL | $ 35,000,000 | ||||
| SERIES B | |||||
| Cormorant Ventures | Series B Pref. | 5,499,450 | 20.0% | $1.8 | $9,999,000 |
| Provident Capital | Series B Pref. | 824,918 | 3.0% | $1.8 | $1,499,850 |
| Blackbox Capital | Series B Pref. | 1,924,808 | 7.0% | $1.8 | $3,499,650 |
| $14,998,500 | |||||
| SERIES A + B | 27,499,175 | 100.0% | $ 49,998,500 |